Exploring the Relationship Between Public Debt and Inflation Expectations: Evidence from Poland
Purpose: This study investigates the impact of both domestic and foreign public debt on inflation expectations in Poland, focusing specifically on the responses of Polish businesses from Q3 2008 to Q1 2025. The purpose is to understand how changes in public debt influence the formulation of inflation expectations and to differentiate the effects of domestic versus foreign debt. Design/Methodology/Approach: The study utilizes quarterly data from the Central Statistical Office of Poland and the National Bank of Poland, incorporating a Vector Autoregression (VAR) model to analyze the dynamic relationships between public debt (both domestic and foreign) and inflation expectations. The analysis employs econometric techniques to explore the interactions and direct effects of public debt on inflation expectations, controlling for variables such as GDP, interest rates, and exchange rates. Findings: The results reveal a statistically significant positive relationship between domestic public debt and inflation expectations, indicating that businesses anticipate higher inflation with rising domestic debt. In contrast, foreign public debt is found to have a negative impact on inflation expectations. The study highlights that the fiscal pressures associated with domestic debt are perceived as a risk of future inflation, while foreign debt influences inflation expectations through exchange rate depreciation and perceived macroeconomic instability. Practical Implications: The findings underscore the importance for policymakers to consider the distinct effects of domestic and foreign public debt when formulating fiscal policies. Understanding these dynamics can help businesses, policymakers, and central banks anticipate inflationary pressures and make informed decisions on fiscal management and monetary policy, especially in times of economic uncertainty. Originality/Value: This research contributes to the literature by distinguishing between domestic and foreign public debt and their respective impacts on inflation expectations in Poland. It also provides valuable insights into the role of businesses' inflation expectations as a critical component of economic forecasting, emphasizing the need for clear communication and transparent fiscal policies to manage inflation expectations effectively.