Suppose the Volcker Disinflation Started a Few Years Early

This graph shows that the "stable" years of the Debt-to-GDP ratio gave way to increase in the early 1980s because that is when the Volcker Disinflation took place:

The graph was done in Excel. Orange is the GDP Deflator. Blue is Debt-to-GDP.

The recession bars, the black GDP Deflator line, and the gray Debt-to-GDP line are an image, captured from a FRED graph and used as a background for the Plot Window in the Excel graph.

I modified the Deflator data in Excel for the years 1977-1982, replacing the inflationary peak of 1981 with a smooth transition connecting 1976 to 1983. Other than that I kept all the annual price change percentages as per the original data. But of course the price level was reduced for all years after 1976.

Real GDP values were unchanged. But because the price level is lower, nominal GDP values are lower. And because the nominal GDP values are lower, the Debt-to-GDP runs higher for all years after 1976.

Because the nominal GDP values were lower, the Debt-to-GDP runs higher for all the years after 1976.

But here's the main thing: Because the disinflation starts in 1977 rather than 1981, the increase in the Debt-to-GDP ratio also starts in 1977 rather than 1981.

The graph is living proof that in the real world, the "stable" years of the Debt-to-GDP ratio gave way to increase in the early 1980s because that is when the Volcker Disinflation took place.

 

Q: Why did the stability of Debt-to-GDP suddenly turn to increase in the 1980s?

A: The Volcker Disinflation.