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Fiscal Deficits and Inflation

Author/Editor: Catão, Luis | Terrones, Marco
Authorized for Distribution: April 1, 2003
Electronic Access: Free Full Text (PDF file size is 1,026KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Macroeconomic theory postulates that fiscal deficits cause inflation. Yet empirical research has had limited success in uncovering this relationship. This paper reexamines the issue in light of broader data and a new modeling approach that incorporates two key features of the theory. Unlike previous studies, we model inflation as nonlinearly related to fiscal deficits through the inflation tax base and estimate this relationship as intrinsically dynamic, using panel techniques that explicitly distinguish between short- and long-run effects of fiscal deficits. Results spanning 107 countries over 1960-2001 show a strong positive association between deficits and inflation among high-inflation and developing country groups, but not among low-inflation advanced economies.
 
Series: Working Paper No. 03/65
Subject(s): Fiscal policy | Budget deficits | Inflation | Developing countries | Economic models
Author's keyword(s): Fiscal Policy | Inflation | Macroeconomic Stabilization | Developing Countries
 
English  
    Published:   April 1, 2003        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA0652003   Pages:   32
    Price:   US$15.00
       
     
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