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In those circumstances, monetary policy becomes ineffective because the value of debt increases year by year.
In fact, even the value of debt itself is not constant.
Inflation helps reduce the total debt stock over time, by reducing the real value of debt.
One main feature of inflation is that it reduces the real value of debt.
The value of debt, which is fixed, would therefore seem less.
Admittedly, that includes the value of debt relief itself, and Mozambique's experience is extreme.
Similar(8)
And, because inflation erodes the real value of debts, people's debt burdens would shrink.
This ratchets up the value of debts, and makes it tempting to postpone every purchase, creating a depressionary trap.
Haircuts range widely but are typically between a third and a half of the value of debts.
Those very spending cuts cause prices to drop, and force up the real value of debts, creating a vicious spiral.
In deflation the nominal value of debts remains fixed even as nominal wages, prices and profits fall.
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