It’s Never Different: Fiscal Policy Shocks and Inflation

IMF Working Papers, May 12, 2023

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It’s Never Different: Fiscal Policy Shocks and Inflation

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Bibliographic details

• Authors: Serhan Cevik, Fedor Miryugin
• Published: May 12, 2023
• Series: IMF Working Papers

Overview and methodology

• Sample: a large panel of 139 countries over the period 1970–2021.
• Identification approaches:
  • Local projections using fiscal policy shocks.
  • Narrative approach.
  • Forecast errors.
  • Cyclically-adjusted data on government revenues and non-interest expenditures to identify exogenous changes in fiscal policy.
• Inflation measures analyzed: both headline and core measures (including core CPI).

Key findings

• Inflation response:
  • Both headline and core measures of inflation increase in response to expansionary shifts in the fiscal policy stance.
• Heterogeneity by country group:
  • Fiscal policy shocks are primarily significant in developing countries.
• Conditional effects:
  • The inflationary impact of fiscal policy shocks depends on:
  • Fiscal space and economic conditions at the time of the shock.
  • Monetary policy type.
  • Exchange rate regimes.
  • Fiscal rules.

Policy implications and recommendations

• Fiscal policy as macro anchor:
  • Fiscal policy is a critical anchor of macroeconomic stability.
• Use of fiscal policy in demand management:
  • Fiscal policy should be used with care in aggregate demand management because it has significant effects on inflation, which are highly dependent on fiscal space and economic conditions.
• Institutional resilience:
  • Flexible exchange rates and rule-based policymaking provide greater resilience to inflationary shocks.

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