We examine the implications for optimal inflation of changes in the level and maturity of government debt under the assumption where fiscal and monetary policies co-ordinate, and in the case of an independent central bank following a Taylor rule. Under co-ordination, inflation persistence and volatility depend on the sign, size and maturity of debt. Higher debt leads to higher inflation and longer maturity leads to more persistent inflation although inflation plays a minor role in achieving fiscal sustainability. Under an independent monetary authority, inflation is higher, more volatile and more persistent and plays a significant role in achieving fiscal solvency. The Economic Journal © 2013 Royal Economic Society.

Marcet is grateful for support from DGES, Monfispol and Excellence Program if Banco de Espana. Faraglia and Scott gratefully acknowledge funding from the ESRC’s World Economy and Finance Program. Oikonomou is grateful to HEC Montreal for funding

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