The Effects of Inflation on Public Finances
IMF Working Papers, May 5, 2023
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- The Effects of Inflation on Public Finances
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Bibliographic details
- Authors: Daniel Garcia-Macia
- Published: May 5, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400241529.001
Summary findings
- Inflation shocks are estimated to improve fiscal balances temporarily.
- Nominal revenues track inflation closely.
- Nominal primary expenditures take longer to catch up to inflation.
- Inflation spikes lead to a persistent reduction in debt to GDP ratios, driven by:
- the primary balance improvement, and
- the nominal GDP denominator channel.
- Debt only falls with inflation surprises—rises in inflation expectations do not improve debt dynamics.
- Results are robust to using various inflation measures and instrumental variables.
Data and scope
- Uses both quarterly and annual panel data for a broad set of economies.
Methodology and robustness
- Dynamic responses of fiscal variables to an inflation shock are documented.
- Robustness checks include alternative inflation measures and instrumental variables.
Policy implications
- Temporary improvement in fiscal balances following inflation shocks suggests limited scope for relying on inflation for durable fiscal consolidation.
- The ineffectiveness of inflation expectation rises in improving debt dynamics indicates limits to debt debasement strategies.
Keywords and subjects (as listed)
- Commodity prices, Deflation, Exchange rate arrangements, Fiscal policy, Fiscal stance, Foreign exchange, Inflation, Prices
- Keywords: Commodity prices, Deflation, Exchange rate arrangements, fiscal balance, Fiscal stance, Global, Inflation, inflation expectation, inflation measure, inflation outlier, inflation shock, inflation surprise, public debt
Daniel Garcia-Macia. "The Effects of Inflation on Public Finances", IMF Working Papers 2023, 093 (May 5, 2023), accessed 8/12/2026, https://doi.org/10.5089/9798400241529.001.
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