Nonlinear effects of public debt on inflation. Does the size of the shadow economy matter?

This paper explores the nonlinear effects of public debt on inflation. Using a sample of 22 emerging economies, our results provide evidence regarding the existence of threshold effects between inflation and public debt. Specifically, we find that emerging countries with a relatively low shadow economy can accommodate increases in public debt without the additional welfare costs that are associated with higher inflation. In contrast, those countries where the shadow economy exceeds 24.3% of GDP face greater macroeconomic costs in terms of inflation. Consequently, they have less room for manoeuvre when dealing with the effects of the COVID-19 pandemic