Fiscal Deficits and Inflation

April 1, 2003

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Luis Catão, and Marco Terrones. Fiscal Deficits and Inflation, (USA: International Monetary Fund, 2003) accessed November 23, 2024

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.

Subject: Budget planning and preparation, Exchange rate arrangements, Foreign exchange, Government debt management, Inflation, Oil prices, Prices, Public financial management (PFM)

Keywords: Budget planning and preparation, Deficit-inflation relationship, Developing Countries, Exchange rate, Exchange rate arrangements, Fiscal Policy, Government debt management, Inflation, Inflation country, Macroeconomic Stabilization, Narrow money, Oil price inflation, Oil prices, PMG estimate, PMG estimator, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/065
Stock No:

WPIEA0652003
ISBN:

9781451848700
ISSN:

1018-5941

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