the debt maturity is longer or the debt rollover is lower. However, the difference from the benchmark case is not necessarily large because the long-term interest rates and debt rollover ratios in the benchmark case are already low. These results imply that modestly higher inflation, even if accompanied by some financial repression, could reduce the public debt burden only marginally in many advanced economies.

We focus on advanced economies and assume that a temporary inflation shock, such as a temporary overshooting of the inflation target, does not affect a central bank’s credibility and monetary policy framework.<sup>3</sup> We also assume that the inflation shock is not correlated with other types of shocks, such as growth shocks or fiscal policy shocks. With these in mind, we use a larger sample of 19 advanced economies compared with previous studies on the effects of inflation on public debt. Other features of our analysis include the combination of simulation and estimation approaches and consideration of financial repression cases in both approaches. Moreover, our estimation approach attempts to add more granularity and robustness relative to existing studies by distinguishing long and short- maturities, identifying the inflation shock in multiple ways, and running regressions at different frequencies.

The remainder of the paper proceeds as follows. Section II briefly reviews the literature on the simulation and empirical analysis of the effects of inflation shocks on public debt. Section III presents our simulation approach, and Section IV presents our estimation approach. Section V concludes.

# **II.   LITERATURE REVIEW**

Table 1(a) summarizes recent studies on the effects of inflation shocks on public debt using simulations. The closest approach to ours is Akitoby et al. (2014), where the effects of a persistent inflation shock that raises inflation to 6 percent for the next five years on the public debt-to-GDP ratio is simulated using the IMF’s _World Economic Outlook_ (WEO) data for G7 countries. Compared to them, we use updated WEO data and expand sample countries. We also take account of the debt rollover ratio more explicitly and examine the effects of a temporary inflation shock as well as a persistent shock. Hilscher et al. (2017) and Equiza-Goñi (2016) also simulate the effects of inflation on public debt-to-GDP ratio based on the debt dynamics equation, but they use more detailed government bonds data (the former also uses option price data to estimate the distribution of inflation risks) focusing on the US and a few euro area countries, respectively. Aizenman and Marion (2011) simply use the US debt maturity in 2009 to approximate the effects of persistently higher inflation. End et al. (2015) uses a model of fiscal account dynamics for the euro area to simulate the effects of persistent inflation/disinflation shocks. Krause and Moyen (2016) uses a New Keynesian dynamic general equilibrium model with an imperfectly observed inflation target and simulate the effects of shocks to the inflation target. While our simulation approach is different

> 3 In some countries (most notably Japan but also euro area and the U.S.), central banks hold substantial amount of long-term government debt, and thus the debt-reducing effect of an inflation shock is partially offset by the loss of central banks. We assume that the loss of central banks caused by an inflation shock in our analysis is not so substantial to affect their credibility and monetary policy frameworks.

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