Fiscal Deficits and Inflation : A New Look at the Emerging Market Evidence

Author/Editor:

Marco Terrones ; Luis Catão

Publication Date:

May 1, 2001

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:

Empirical studies have had little success in finding a statistically significant relationship between fiscal deficits and inflation in broad cross-country panels. This paper provides new econometric estimates for a panel of 23 emerging market countries during 1970-2000. Unlike previous studies, we allow for a rich dynamic specification and focus on the long-run relationship between the two variables controlling for differences in the inflation tax base. We find that a 1 percentage point reduction in the ratio of fiscal deficit to GDP typically lowers long-run inflation by 1½ to 6 percentage points, depending on the size of the inflation tax base.

Series:

Working Paper No. 01/74

Subject:

English

Publication Date:

May 1, 2001

ISBN/ISSN:

9781451849592/1018-5941

Stock No:

WPIEA0742001

Format:

Paper

Pages:

31

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