Fiscal Deficits and Inflation

Author/Editor:

Luis Catão ; Marco Terrones

Publication Date:

April 1, 2003

Electronic Access:

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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:

English

Publication Date:

April 1, 2003

ISBN/ISSN:

9781451848700/1018-5941

Stock No:

WPIEA0652003

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

33

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