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---

### Overview
- Scope and sample:
  - Panel of 139 countries over the period 1970-2021.
  - Dependent variable: inflation measured as year-on-year percentage change in the consumer price index (CPI) (headline and core).
- Key research question:
  - How do fiscal policy shocks affect consumer price inflation, and do these effects depend on the state of the economy and fiscal space?
- Fiscal shock definition:
  - Identified as a deterioration of one standard deviation in the overall or primary budget balance as a share of GDP.

### Main empirical findings
- Aggregate effects:
  - A deterioration of one standard deviation in the overall budget balance-to-GDP ratio leads to an increase of 0.56 percentage points in headline inflation in the first year.
  - The same deterioration leads to an increase of 0.71 percentage points on a cumulative basis over the medium term (after 4 years).
  - Using the primary budget balance-to-GDP ratio yields a similar short-term impact: an increase of 0.49 percentage points in headline inflation in the short term with no persistent effect over the medium term.
  - Core inflation (excluding food and energy) shows larger responses: impacts of 0.72 and 0.83 percentage points for overall and primary balance measures, respectively (short term).
- Heterogeneity across country groups:
  - Developing countries (emerging market economies and low-income countries): headline inflation increases by 0.6 percentage points in the first year and rises to 0.74 percentage points cumulatively after 4 years.
  - Advanced economies: headline inflation increases by 0.44 percentage points in the first year and 0.39 percentage points over the medium run.
  - Core inflation in developing countries: overall-balance deterioration associated with 0.78 percentage points in the first year and 1.5 percentage points over the medium term; primary-balance deterioration yields 0.89 percentage points in the first year and 1.71 percentage points over the medium term.
- Commodity-exporting vs. non-commodity-exporting countries:
  - Commodity exporters: overall-balance deterioration associated with 0.4 percentage points increase in headline inflation in the first year and an additional 0.58 percentage point in the second year.
  - Non-commodity exporters: estimated first-year effect of 0.64 percentage points with a correction by -0.13 in the second year.
  - Commodity exporters show a smaller or insignificant impact on core inflation.
- Period heterogeneity:
  - Fiscal shocks had a larger impact in 1970-2000 than in 2001-2021: an overall-balance fiscal shock increased headline inflation by 1.64 percentage points in 1970-2000 versus 0.45 percentage points in 2001-2021 (first-year effects).
- Fiscal space (public debt) and business cycle:
  - High-debt states: a deterioration of one standard deviation in the overall budget balance translates into a 0.88 percentage points increase in headline inflation in the first year and 0.72 percentage points cumulatively after 4 years.
  - Low-debt states: impact is statistically insignificant and smaller; measured by primary budget balance the impact in low-debt vs. high-debt states is 0.31 vs. 0.67 percentage points, respectively.
  - State of the business cycle: a deterioration of one standard deviation in the overall budget balance leads to an increase of 1.2 percentage points during recessions and virtually no impact during expansions.
- Policy-framework interactions:
  - Inflation targeting: change in both headline and core inflation after an overall-balance fiscal shock remains insignificantly different from zero; countries targeting inflation see a significant drop in core inflation in the third and fourth years. Primary balance shocks increase headline inflation in inflation-targeting countries but have no impact on core inflation.
  - Floating exchange rates: fiscal shock effects are insignificant over a four-year period (exchange rate adjusts to absorb shock).
  - Fixed exchange rates: one year after an overall-balance shock, headline inflation increases by about 0.52 percentage points and remains significant at 0.34 percentage points in the following year; core inflation jumps by 0.8 percentage points and remains high with no significant downward correction.
  - Fiscal rules: absence of a fiscal rule: a one standard deviation deterioration in the overall budget balance associated with an increase of 1.17 percentage points in headline inflation in the first year; presence of a fiscal rule: comparable increase is 0.29 percentage points in the first year.
- Disaggregated fiscal components:
  - A one standard deviation shock to non-interest expenditures (an increase in the primary spending-to-GDP ratio) leads to higher headline inflation.

### Methodology and model specification
- Estimation approach:
  - Local projection (LP) method (Jordà, 2005) to estimate impulse response functions (IRFs).
  - Semi-parametric LP accommodates panel structure and allows for nonlinear dynamic responses.
- Baseline regression:
  - Dependent variable: difference in inflation between t+h and t-1.
  - Key regressor: fiscal shock (fs_i,t) with coefficient β_h representing cumulative response h years after the shock.
  - Controls X_i,t include 3 lags of fiscal shocks, 3 lags of the dependent variable, 3 lags of real GDP growth, real GDP per capita, international trade as a share of GDP, money supply growth, credit to the private sector as a share of GDP, and the CBIE index.
  - Estimation: Ordinary Least Squares (OLS) with Spatial Correlation Consistent (SCC) standard errors (Driscoll and Kraay, 1998).
- State-dependent model:
  - Responses vary with the output gap (HP filter) and normalized public debt-to-GDP (zero mean, unit variance).
  - Weighting function F(z_i,t) = exp(−γ z_i,t) / [1+exp(−γ z_i,t)], with γ>0.
  - Coefficients β_h^K and β_h^L capture impacts in recessions (F≈1) and expansions ([1−F]≈1), respectively.
  - Estimation uses γ = 10; HP filter smoothing parameter: 6.25 on annual data.
  - Results for headline inflation remain broadly unchanged with γ between 0.1 and 10.

### Robustness and alternative identification
- Alternative identification approaches:
  - Narrative approach covering 17 advanced economies (1980–2011) and 14 emerging market economies (1991–2017).
  - Forecast errors approach (difference between actual and one-year-ahead forecast): applied in 35 advanced and 50 emerging market economies over 2003–2021 (85 countries for forecast-errors robustness across 2003–2021).
  - Cyclically-adjusted government revenues and non-interest expenditures.
- Statistical precautions:
  - Spatial and serial correlation addressed via Driscoll–Kraay procedure.
  - Panel unit root tests using the Im-Pesaran-Shin (2003) procedure show variables are stationary after logarithmic transformation or first differencing.
  - Extreme outliers (e.g., hyperinflation in Zimbabwe, transition period in former Soviet republics) removed.
- Robustness results:
  - Alternative identification (narrative, forecast-error, cyclically-adjusted fiscal series) confirms baseline results.
  - Alternative fiscal-space measure: interest payments as a share of GDP yields similar results.
  - Re-estimation on smaller sample where core CPI is available—results not materially different.
  - Excluding low-income countries—results broadly similar.

### Key numeric estimates (selected)
- Baseline coefficients (Overall Balance → Headline CPI, Appendix Table A4):
  - Overall balance growth, t-1: t+1 coefficient 0.564*** (std. err. 0.172); t+2 0.233 (0.186); t+3 -0.033 (0.133); t+4 -0.056 (0.150).
  - Num. of observations: t+1 3,107; t+2 3,006; t+3 2,902; t+4 2,785. Num. of countries 139. R squared: 0.243, 0.235, 0.291, 0.222 respectively.
- State-dependent examples (Appendix Tables A6–A8):
  - Overall Balance, γ=10 baseline: Low Debt t+1 0.279 (0.169); High Debt t+1 0.883*** (0.294). Num. of observations 2,867.
  - Primary Balance, γ=10 baseline: Low Debt t+1 0.309** (0.144); High Debt t+1 0.668** (0.275). Num. of observations 2,831.
  - Overall Balance, state = Output Gap, γ=10 baseline: Recession t+1 1.215*** (0.249); Expansion t+1 0.017 (0.196). Num. of observations 3,105.
- Appendix Table A9 (Primary Balance → Headline CPI, alternative γ values), selected t+1 estimates:
  - γ = 0.1: Recession t+1 2.529 (1.818); Expansion t+1 -1.475 (1.856).
  - γ = 0.5: Recession t+1 1.093** (0.426); Expansion t+1 -0.035 (0.453).
  - γ = 1: Recession t+1 0.960*** (0.276); Expansion t+1 0.102 (0.291).
  - γ = 5: Recession t+1 0.819*** (0.199); Expansion t+1 0.229 (0.197).
  - γ = 10 (baseline): Recession t+1 0.817*** (0.193); Expansion t+1 0.234 (0.189).
  - Num. of observations by horizon: t+1 3,056; t+2 2,956; t+3 2,852; t+4 2,735.

### Appendix — summary statistics (selected)
- Headline Inflation: min -9.86; p25 1.59; p50 3.35; p75 6.77; max 96.87; mean 5.39; sd 7.23; N 3,130.
- Core Inflation: min -29.92; p25 1.22; p50 2.27; p75 4.84; max 61.44; mean 3.98; sd 6.82; N 1,475.
- Overall Balance: min -32.12; p25 -4.63; p50 -2.33; p75 0.00; max 43.30; mean -1.88; sd 5.88; N 3,130.
- Primary Balance: min -30.51; p25 -2.62; p50 -0.50; p75 1.59; max 36.14; mean -0.11; sd 5.27; N 3,089.
- ∆ Real GDP: min -54.24; p25 1.63; p50 3.70; p75 5.74; max 86.83; mean 3.51; sd 4.89; N 3,130.
- Output Gap (norm.): min -9.23; p25 -0.34; p50 0.00; p75 0.37; max 7.13; mean 0.00; sd 1.00; N 3,130.
- Gross Debt (norm.): min -1.50; p25 -0.68; p50 -0.23; p75 0.45; max 6.07; mean 0.00; sd 1.00; N 2,980.
- Interest Exp. (norm.): min -0.95; p25 -0.64; p50 -0.27; p75 0.26; max 6.54; mean 0.00; sd 1.00; N 1,695.

### Policy implications and recommendations
- Fiscal policy is a critical anchor of macroeconomic stability.
- Fiscal policy should be used with care in aggregate demand management because it has significant effects on inflation that depend on fiscal space and economic conditions.
- Institutional frameworks that increase resilience to inflationary pressures from fiscal shocks:
  - Flexible exchange rate regimes (floating exchange rates help absorb fiscal shocks via exchange rate adjustments rather than through domestic prices).
  - Rule-based policymaking: inflation targeting for monetary policy reduces some inflationary impacts of fiscal shocks; fiscal rules limit the inflationary impact of fiscal policy shocks.
  - Strengthening fiscal space (lower gross debt or lower interest payments as a share of GDP) reduces the inflationary pass-through of fiscal shocks.

*Source: wpiea2023098-print-pdf (IMF PDF content provided).*

### 2020. This is not just a recurring problem in developing countries, but it could also become an

### wpiea2023098-print-pdf - 2020. This is not just a recurring problem in developing countries, but it could also become an

### Overview
- Scope and sample:
  - Panel of 139 countries over the period 1970-2021.
  - Dependent variable: inflation measured as year-on-year percentage change in the consumer price index (CPI) (headline and core).
- Key research question:
  - How do fiscal policy shocks affect consumer price inflation, and do these effects depend on the state of the economy and fiscal space?
- Fiscal shock definition:
  - Identified as a deterioration of one standard deviation in the overall or primary budget balance as a share of GDP.

### Main empirical findings
- Aggregate effects:
  - A deterioration of one standard deviation in the overall budget balance-to-GDP ratio leads to an increase of 0.56 percentage points in headline inflation in the first year.
  - The same deterioration leads to an increase of 0.71 percentage points on a cumulative basis over the medium term.
  - The inflationary impact is of similar magnitude when using the primary budget balance, and is estimated to be much larger on core inflation (excluding food and energy).
- Heterogeneity across country groups:
  - Fiscal policy shocks are primarily significant in developing countries (emerging market economies and low-income countries).
  - The impact of fiscal shocks on headline inflation is significantly greater in developing countries; effects on core inflation are broadly equal across all countries.
- State dependence (fiscal space and business cycle):
  - Inflation increases more following a fiscal shock when fiscal space is more constrained as measured by higher public debt-to-GDP (or higher interest payments as a share of GDP).
  - Inflationary effects are larger when the fiscal shock occurs during economic expansions than during recessions.
- Policy framework interactions:
  - Countries with more flexible exchange rate regimes, inflation targeting monetary frameworks, or explicit fiscal rules appear more resilient to inflationary pressures from fiscal shocks.

### Data and identification strategies
- Data sources and measures:
  - CPI series (headline and core) drawn from the World Bank’s global database of inflation.
  - Fiscal data from the IMF’s Government Finance Statistics (GFS) database.
- Alternative identification approaches used as robustness checks:
  - Narrative approach covering 17 advanced economies (1980–2011) and 14 emerging market economies (1991–2017).
  - Forecast errors approach (difference between actual and one-year-ahead forecast): applied in 35 advanced and 50 emerging market economies over 2003–2021.
  - Cyclically-adjusted government revenues and non-interest expenditures.
- Time-series properties:
  - Panel unit root tests using the Im-Pesaran-Shin (2003) procedure show variables are stationary after logarithmic transformation or first differencing.
- Sample exclusions:
  - Extreme outliers (e.g., hyperinflation in Zimbabwe, transition period in former Soviet republics) removed.

### Empirical strategy and model specification
- Methodology:
  - Local projection (LP) method (Jordà, 2005) to estimate impulse response functions (IRFs).
  - Semi-parametric LP accommodates panel structure and allows for nonlinear dynamic responses.
- Baseline regression (summary form):
  - Dependent variable: difference in inflation between t+h and t-1.
  - Key regressor: fiscal shock (fs_i,t) with coefficient β_h representing cumulative response h years after the shock.
  - Controls X_i,t include 3 lags of fiscal shocks, 3 lags of the dependent variable, 3 lags of real GDP growth, real GDP per capita, international trade as a share of GDP, money supply growth, credit to the private sector as a share of GDP, and the CBIE index.
  - Estimation: Ordinary Least Squares (OLS) with Spatial Correlation Consistent (SCC) standard errors (Driscoll and Kraay, 1998).
- Confidence bands and interpretation:
  - IRFs plotted with 90 percent and 68 percent confidence bands.
  - Results interpreted as impact on the difference between inflation h years after the shock and prior inflation.
- State-dependent model:
  - Allows responses to vary with the output gap (HP filter) and normalized public debt-to-GDP (zero mean, unit variance).
  - Weighting function F(z_i,t) = exp(−γ z_i,t) / [1+exp(−γ z_i,t)], with γ>0.
  - Coefficients β_h^K and β_h^L capture impacts in recessions (F≈1) and expansions ([1−F]≈1), respectively.
  - Estimation uses γ = 10.
  - HP filter smoothing parameter: 6.25 on annual data.
  - Results for headline inflation remain broadly unchanged with γ between 0.1 and 10.

### Robustness and supporting evidence
- Alternative identification (narrative, forecast-error, cyclically-adjusted fiscal series) confirms baseline results.
- Spatial and serial correlation addressed via Driscoll–Kraay procedure.
- Stationarity tested via Im-Pesaran-Shin (2003).

### Policy implications and recommendations
- Fiscal policy is a critical anchor of macroeconomic stability.
- Fiscal policy should be used with care in aggregate demand management because it has significant effects on inflation that depend on fiscal space and economic conditions.
- Institutional frameworks that increase resilience:
  - Flexible exchange rate regimes.
  - Rule-based policymaking: inflation targeting for monetary policy and fiscal rules for fiscal policy.

*Source: IMF working paper content (excerpt).*

### 0.56 percentage points in the short term (after one year), which dissipates over the medium term

### wpiea2023098-print-pdf - 0.56 percentage points in the short term (after one year), which dissipates over the medium term

### Key empirical findings
- A deterioration of one standard deviation in the overall budget balance-to-GDP ratio leads to:
  - an increase of 0.56 percentage points in headline inflation in the first year.
  - an increase of 0.71 percentage points on a cumulative basis over the medium term (after 4 years).
- Using the primary budget balance-to-GDP ratio as the fiscal stance yields a similar short-term inflationary impact: an increase of 0.49 percentage points in headline inflation in the short term with no persistent effect over the medium term.
- Core inflation (excluding food and energy) responds more strongly:
  - impacts of 0.72 and 0.83 percentage points for overall and primary balance measures, respectively (short term).
- Income-group heterogeneity:
  - Developing countries (emerging market economies and low-income countries): headline inflation increases by 0.6 percentage points in the first year and rises to 0.74 percentage points cumulatively after 4 years.
  - Advanced economies: headline inflation increases by 0.44 percentage points in the first year and 0.39 percentage points over the medium run.
  - Core inflation in developing countries: a one standard deviation deterioration in the overall budget balance is associated with 0.78 percentage points in the first year and 1.5 percentage points over the medium term; using the primary budget balance yields 0.89 percentage points in the first year and 1.71 percentage points over the medium term.
- Commodity-exporting vs. non-commodity-exporting countries:
  - Commodity exporters: a one standard deviation deterioration in the overall budget balance is associated with an increase of 0.4 percentage points in headline inflation in the first year and an additional 0.58 percentage point in the second year.
  - Non-commodity exporters: estimated first-year effect of 0.64 percentage points with a correction by -0.13 in the second year.
  - Commodity exporters show a smaller or insignificant impact on core inflation.
- Period heterogeneity:
  - Fiscal shocks had a larger impact in 1970-2000 than in 2001-2021: an overall-balance fiscal shock increased headline inflation by 1.64 percentage points in 1970-2000 versus 0.45 percentage points in 2001-2021 (first-year effects reported for the respective periods).
- Role of fiscal space (public debt):
  - In high-debt states, a deterioration of one standard deviation in the overall budget balance translates into a 0.88 percentage points increase in headline inflation in the first year and 0.72 percentage points cumulatively after 4 years.
  - In low-debt states the impact is statistically insignificant and smaller.
  - Measured by primary budget balance: impact in low-debt vs. high-debt states is 0.31 vs. 0.67 percentage points, respectively.
  - Effects on core inflation are statistically insignificant in low-debt states but exceed 1 percentage point in the first year in high-debt states.
- State of the business cycle:
  - A deterioration of one standard deviation in the overall budget balance leads to an increase of 1.2 percentage points during recessions and virtually no impact during expansions.
  - Core inflation point estimates are higher in recessions but often insignificant; an exception: primary balance in expansionary phases yields an effect of 0.85 percentage points in the third year following the shock (and becomes significant).
- Monetary and exchange rate frameworks:
  - Inflation targeting: change in both headline and core inflation after an overall-balance fiscal shock remains insignificantly different from zero; countries targeting inflation see a significant drop in core inflation in the third and fourth years. Primary balance shocks increase headline inflation in inflation-targeting countries but have no impact on core inflation.
  - Floating exchange rates: fiscal shock effects are insignificant over a four-year period (exchange rate adjusts to absorb shock).
  - Fixed exchange rates: one year after an overall-balance shock, headline inflation increases by about 0.52 percentage points and remains significant at 0.34 percentage points in the following year; core inflation jumps by 0.8 percentage points and remains high with no significant downward correction.
- Fiscal rules:
  - Countries without a fiscal rule: a one standard deviation deterioration in the overall budget balance is associated with an increase of 1.17 percentage points in headline inflation in the first year.
  - Countries with a fiscal rule: the comparable increase is 0.29 percentage points in the first year.
- Disaggregated fiscal components:
  - A one standard deviation shock to non-interest expenditures (an increase in the primary spending-to-GDP ratio) leads to higher headline inflation.

### Methodology and robustness checks
- Data: Panel of 139 countries, period 1970-2021.
- Identification: Fiscal policy shocks identified as a deterioration of one standard deviation in the overall or primary budget balance as a share of GDP.
- Estimation: Local projections (LP method) to estimate impulse response functions (IRFs); standard errors corrected for heteroskedasticity, spatial and serial correlation by the Driscoll–Kraay procedure; confidence intervals reported at 90 percent and 68 percent levels (figures referenced).
- Robustness:
  - Narrative approach for a subset of 17 advanced economies (1980–2011) and 14 emerging market economies (1991–2017).
  - Forecast errors (actual budget balance minus forecast) for 85 countries (2003–2021).
  - Alternative fiscal-space measure: interest payments as a share of GDP (similar results).
  - Cyclically-adjusted revenues and non-interest expenditures (opposing effects of revenue and expenditure shocks found).
  - Re-estimation of headline CPI effects on smaller sample where core CPI is also available—results not materially different.
  - Excluding low-income countries—results broadly similar.

### Policy implications and recommendations
- Fiscal policy is a critical anchor of macroeconomic stability.
- Fiscal policy should be used with care in aggregate demand management because it has significant effects on inflation that are highly dependent on fiscal space and economic conditions.
- Flexible exchange rates and rule-based policymaking provide greater resilience to inflationary shocks:
  - Inflation targeting for monetary policy reduces some inflationary impacts of fiscal shocks.
  - Fiscal rules limit the inflationary impact of fiscal policy shocks.
  - Floating exchange rate regimes help absorb fiscal shocks via exchange rate adjustments rather than through domestic prices.

*Italic: Source — wpiea2023098-print-pdf (IMF PDF content provided).*

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### Appendix — Key summary statistics (Appendix Table A1)
- Headline Inflation: min -9.86; p25 1.59; p50 3.35; p75 6.77; max 96.87; mean 5.39; sd 7.23; N 3,130.
- Core Inflation: min -29.92; p25 1.22; p50 2.27; p75 4.84; max 61.44; mean 3.98; sd 6.82; N 1,475.
- Overall Balance: min -32.12; p25 -4.63; p50 -2.33; p75 0.00; max 43.30; mean -1.88; sd 5.88; N 3,130.
- Primary Balance: min -30.51; p25 -2.62; p50 -0.50; p75 1.59; max 36.14; mean -0.11; sd 5.27; N 3,089.
- ∆ Real GDP: min -54.24; p25 1.63; p50 3.70; p75 5.74; max 86.83; mean 3.51; sd 4.89; N 3,130.
- ∆ Real GDP per capita: min -0.80; p25 0.00; p50 0.02; p75 0.04; max 1.90; mean 0.02; sd 0.07; N 3,130.
- ∆ Trade to GDP: min -81.83; p25 -2.85; p50 0.68; p75 4.08; max 64.47; mean 0.54; sd 8.74; N 3,130.
- ∆ Money: min -0.51; p25 0.05; p50 0.10; p75 0.18; max 1.54; mean 0.13; sd 0.13; N 3,130.
- CB Independence: min -76.02; p25 -0.91; p50 0.64; p75 2.72; max 148.50; mean 1.05; sd 6.86; N 3,130.
- ∆ Credit to GDP: min 0.14; p25 0.48; p50 0.63; p75 0.80; max 0.93; mean 0.63; sd 0.19; N 3,130.
- Output Gap (norm.): min -9.23; p25 -0.34; p50 0.00; p75 0.37; max 7.13; mean 0.00; sd 1.00; N 3,130.
- Gross Debt (norm.): min -1.50; p25 -0.68; p50 -0.23; p75 0.45; max 6.07; mean 0.00; sd 1.00; N 2,980.
- Interest Exp. (norm.): min -0.95; p25 -0.64; p50 -0.27; p75 0.26; max 6.54; mean 0.00; sd 1.00; N 1,695.

### Appendix — Panel unit root tests (Appendix Table A2)
- Panel A (Dependent Variables), Im-Pesaran-Shin Test results:
  - Headline Inflation: No serial correlation t-stat. -18.72; p-val. 0.00. Num. of panels 134; Avg. num. of periods 23.02.
  - Core Inflation: No serial correlation t-stat. -12.17; p-val. 0.00. Num. of panels 66; Avg. num. of periods 21.50.
  - Serially correlated errors: multiple rows (AIC Lags 1–4 and demean) all report t-stats and p-values of 0.00 for both series (examples: AIC, Lag 1 Headline Inflation t-stat. -26.82; p-val. 0.00; Core Inflation t-stat. -18.43; p-val. 0.00).
- Panel B (Control Variables), Im-Pesaran-Shin Test (AIC, Lags 2) t-stat. and p-val.:
  - Overall Balance: t-stat. -13.64; p-val. 0.00.
  - Primary Balance: t-stat. -12.00; p-val. 0.00.
  - ∆ Real GDP: t-stat. -28.80; p-val. 0.00.
  - ∆ Real GDP per capita: t-stat. -30.47; p-val. 0.00.
  - ∆ Credit to GDP: t-stat. -28.78; p-val. 0.00.
  - ∆ Trade to GDP: t-stat. -37.48; p-val. 0.00.
  - ∆ Money: t-stat. -24.14; p-val. 0.00.
  - Num. of panels 134; Avg. num. of periods 22.96.
- Note: Results for CB Independence are not computed due to insufficient number of time periods.

### Appendix — Country income classification (Appendix Table A3)
- The sample consists of 139 countries. Examples by group (only countries in the sample are displayed):
  - AE (Advanced Economies): Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Korea, Rep., Luxembourg, Malta, Netherlands, New Zealand, Norway, Portugal, Slovak Rep., Slovenia, Spain, Sweden, Switzerland, United Kingdom, United States.
  - EM (Emerging Markets): Albania, Algeria, Angola, Argentina, Bahrain, Bangladesh (listed LIC but appears in sample groups), Brazil, Chile, China, Colombia, Croatia, Czech Republic appears also AE, etc. (full table displays 139 sample countries).
  - LIC (Low-Income Countries): Benin, Burkina Faso, Burundi, Cambodia, Cameroon, Chad, Comoros, Congo, Dem. Rep., Congo, Rep., Côte d'Ivoire, Eritrea not listed, Guinea, Haiti, Kyrgyz Republic, Lao PDR, Mali, Mauritania, Moldova, Mongolia, Nepal, Niger, Nigeria listed LIC in table, Rwanda, Senegal, Sierra Leone, Somalia not listed, Tanzania, Togo, Uganda, Uzbekistan, Vietnam listed LIC, Yemen, Rep., Zambia, Zimbabwe.
- Note: Only countries in the sample are displayed in the table. The sample consists of 139 countries.

### Appendix — Regression and robustness summaries (selected tables)
- Appendix Table A4. Overall Balance and Headline CPI: Full Specification (dependent variable ∆ HCPI at t+1 to t+4)
  - Overall balance growth, t-1: t+1 coefficient 0.564*** (std. err. 0.172); t+2 0.233 (0.186); t+3 -0.033 (0.133); t+4 -0.056 (0.150).
  - Real GDP growth, t-1: t+1 -0.020 (0.195); t+2 -0.281 (0.172); t+3 -0.285* (0.163); t+4 -0.403*** (0.140).
  - Real GDP growth, t-2: t+1 -0.309* (0.179); t+2 -0.164 (0.149); t+3 -0.349** (0.160); t+4 -0.122 (0.135).
  - Real GDP per capita: t+1 60.523** (23.136); t+2 -6.875 (7.919); t+3 -27.009*** (6.040); t+4 -18.260** (8.525).
  - Credit to GDP growth: t+1 0.331** (0.128); t+2 -0.310*** (0.112); t+3 -0.164** (0.068); t+4 -0.077 (0.088).
  - Trade openness growth: t+1 -0.534*** (0.120); t+2 -0.080 (0.089); t+3 0.112 (0.111); t+4 -0.060 (0.077).
  - Money growth: t+1 -31.994** (13.946); t+2 -0.510 (13.100); t+3 25.176*** (6.694); t+4 11.383** (4.628).
  - CB independence: t+1 14.444 (9.606); t+2 18.189* (9.344); t+3 10.410 (6.248); t+4 6.344 (4.037).
  - Dep. Var. lags (t-1, t-2, t-3) report significant positive coefficients (examples: Dep. Var., t-1 at t+1 is 1.367*** (0.291)).
  - Num. of observations: t+1 3,107; t+2 3,006; t+3 2,902; t+4 2,785. Num. of countries 139. R squared: 0.243, 0.235, 0.291, 0.222 respectively.
  - Note: Country and year fixed effects included; Driscoll–Kraay standard errors reported. Significance: *** p<0.01, ** p<0.05, * p<0.1.
- Appendix Tables A6–A8: Robustness checks across alternative parameterizations for fiscal space (state = Gross Debt), primary balance, and business cycle (state = Output Gap). Selected exact coefficient examples (state = Gross Debt, headline inflation t+1, γ=10 baseline):
  - Appendix Table A6 (Overall Balance, γ=10 baseline): Low Debt t+1 0.279 (0.169); High Debt t+1 0.883*** (0.294). Num. of observations 2,867.
  - Appendix Table A7 (Primary Balance, γ=10 baseline): Low Debt t+1 0.309** (0.144); High Debt t+1 0.668** (0.275). Num. of observations 2,831.
  - Appendix Table A8 (Overall Balance, state = Output Gap, γ=10 baseline): Recession t+1 1.215*** (0.249); Expansion t+1 0.017 (0.196). Num. of observations 3,105.
  - Significance notation across tables: * p<0.05 ** p<0.01 *** p<0.001 (Appendix Table A6 uses *** p<0.001, ** p<0.01, * p<0.05).

### Appendix — Figures and subgroup listings (descriptions)
- Appendix Figure A1. Fiscal Shocks and Inflation: Commodity Exporters vs. Others
  - Depicts response of inflation to a one standard deviation negative fiscal policy shock computed by the LP method.
  - Standard errors corrected by Driscoll–Kraay; shaded area 90 percent confidence interval; dashed lines 68 percent confidence interval.
- Appendix Table A5. Commodity Exporters (sample list): Algeria, Angola, Australia, Azerbaijan, Bahrain, Bolivia, Botswana, Brunei Darussalam, Cameroon, Canada, Chad, Chile, Colombia, Congo, Dem. Rep., Congo, Rep., Côte d'Ivoire, Ecuador, Egypt, Equatorial Guinea, Estonia, Gabon, Gambia, The, Ghana, Guinea, Guyana, Iran, Islamic Rep., Iraq, Kazakhstan, Kuwait, Libya, Macao SAR, China, Malaysia, Maldives, Mauritania, Mexico, Mongolia, Morocco, Mozambique not listed, Namibia not listed, Nigeria, Norway, Oman, Peru, Qatar, Russian Federation, Saudi Arabia, South Africa, United Arab Emirates, Venezuela, Yemen, Rep., Zambia.
- Appendix Figure A2. Fiscal Shocks and Inflation: Periods of High and Low Inflation Dispersion
  - Panels for Overall Balance and Primary Balance; subpanels for Headline and Core; comparisons 1970-2000 vs. 2001-2021; same LP method and Driscoll–Kraay corrections, shaded 90 percent CI, dashed 68 percent CI.
- Appendix Figure A3. Fiscal Shocks and Inflation: Role of Fiscal Space (Cost of Debt)
  - Panels for Overall Balance and Primary Balance; Headline and Core; Low Debt vs. High Debt. Cost of debt calculated as ratio of interest payments to gross debt. Same inference and CI conventions.

*Source: wpiea2023098-print-pdf - REFERENCES*

### Appendix Table A9. Primary Balance and Headline CPI—Business Cycle: Alternative Parameters

### Appendix Table A9. Primary Balance and Headline CPI—Business Cycle: Alternative Parameters

### Estimated impacts by state (Output Gap) and horizon (Headline Inflation)
- Columns label horizons: t+1, t+2, t+3, t+4.
- Rows report coefficient estimates with Driscoll–Kraay standard errors in parentheses. Significance: * p<0.05 ** p<0.01 *** p<0.001.

- γ = 0.1
  - Recession:
    - t+1: 2.529 (1.818)
    - t+2: -3.013* (1.609)
    - t+3: -2.573* (1.407)
    - t+4: -0.781 (1.173)
  - Expansion:
    - t+1: -1.475 (1.856)
    - t+2: 3.343** (1.449)
    - t+3: 2.508* (1.252)
    - t+4: 0.737 (1.327)

- γ = 0.5
  - Recession:
    - t+1: 1.093** (0.426)
    - t+2: -0.521 (0.467)
    - t+3: -0.651 (0.389)
    - t+4: -0.313 (0.198)
  - Expansion:
    - t+1: -0.035 (0.453)
    - t+2: 0.863*** (0.296)
    - t+3: 0.606** (0.247)
    - t+4: 0.265 (0.304)

- γ = 1
  - Recession:
    - t+1: 0.960*** (0.276)
    - t+2: -0.217 (0.359)
    - t+3: -0.433 (0.277)
    - t+4: -0.229 (0.156)
  - Expansion:
    - t+1: 0.102 (0.291)
    - t+2: 0.567*** (0.181)
    - t+3: 0.391*** (0.138)
    - t+4: 0.184 (0.187)

- γ = 5
  - Recession:
    - t+1: 0.819*** (0.199)
    - t+2: 0.065 (0.307)
    - t+3: -0.309 (0.220)
    - t+4: -0.083 (0.176)
  - Expansion:
    - t+1: 0.229 (0.197)
    - t+2: 0.334** (0.153)
    - t+3: 0.244*** (0.090)
    - t+4: 0.052 (0.137)

- γ = 10 (baseline)
  - Recession:
    - t+1: 0.817*** (0.193)
    - t+2: 0.093 (0.298)
    - t+3: -0.269 (0.203)
    - t+4: -0.051 (0.172)
  - Expansion:
    - t+1: 0.234 (0.189)
    - t+2: 0.309* (0.154)
    - t+3: 0.206** (0.091)
    - t+4: 0.031 (0.140)

### Key statistics and estimation details
- Num. of observations by horizon:
  - t+1: 3,056
  - t+2: 2,956
  - t+3: 2,852
  - t+4: 2,735
- Country and year fixed effects are included in all specifications but not displayed.
- Driscoll–Kraay standard errors are reported in parenthesis.
- Significance legend: * p<0.05  ** p<0.01  *** p<0.001

*Appendix Table A9. Primary Balance and Headline CPI—Business Cycle: Alternative Parameters (wpiea2023098-print-pdf)*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023098-print-pdf.pdf_