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Inflation and public debt reversals in advanced economies
Contemporary Economic Policy  (IF0.943),  Pub Date : 2021-07-06, DOI: 10.1111/coep.12537
Ichiro Fukunaga, Takuji Komatsuzaki, Hideaki Matsuoka

This paper quantitatively assesses the effects of inflation shocks on the public debt-to-GDP ratio in 19 advanced economies using simulation and estimation approaches. The simulations suggest that 1 percentage point shock to the inflation rate can reduce the debt-to-GDP ratio by about 0.7 percentage points on average across countries, while the estimated impulse responses are a little larger and more persistent. Additional assumptions taking into account financial repression do not necessarily make these effects substantially larger. These results imply that modestly higher inflation, even if accompanied by some financial repression, could reduce the public debt burden only marginally.