Inflation and Public Debt Reversals in Advanced Economies

By Ichiro Fukunaga, Takuji Komatsuzaki, Hideaki Matsuoka

December 27, 2019

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Ichiro Fukunaga, Takuji Komatsuzaki, and Hideaki Matsuoka. Inflation and Public Debt Reversals in Advanced Economies, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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 based on the debt dynamics equation and estimations of impulse responses by local projections both suggest that a 1 percentage point shock to inflation rate reduces the debt-to-GDP ratio by about 0.5 to 1 percentage points. The results also suggest that the impact is larger and more persistent when the debt maturity is longer, but the difference from the benchmark case is not significant. These results imply that modestly higher inflation, even if accompanied by some financial repression, could reduce public debt burden only marginally in many advanced economies.

Subject: Asset and liability management, Debt reduction, Deflation, Financial services, Inflation, Long term interest rates, Prices, Public debt

Keywords: Advanced economies, Debt maturity, Debt reduction, Deflation, Deflation shock, Financial repression, Global, Inflation, Inflation expectation, Inflation shock, Long term interest rates, Public debt, Rollover ratio, WP

Publication Details

Pages:

23
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/297
Stock No:

WPIEA2019297
ISBN:

9781513521596
ISSN:

1018-5941

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