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

May 1, 2001

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.

Subject: Exchange rate arrangements, External debt, Foreign exchange, Government debt management, Inflation, Interest payments, Oil prices, Prices, Public financial management (PFM)

Keywords: deficit concept, deficit measure, deficit variable, deficit-inflation relationship, Emerging Markets, exchange rate, Exchange rate arrangements, fiscal deficit, Fiscal Policy, Global, Government debt management, Inflation, Interest payments, narrow money, oil price, Oil prices, PMGE estimate, world inflation, WP

Pages:
31
Volume:
2001
DOI:
---
Issue:
074
Series:
Working Paper No. 2001/074
Stock No:
WPIEA0742001
ISBN:
9781451849592
ISSN:
1018-5941

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