Fiscal Deficits and Inflation: A New Look at the Emerging Market Evidence
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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. 2001/074
Subject:
Exchange rate arrangements External debt Foreign exchange Government debt management Inflation Interest payments Oil prices Prices Public financial management (PFM)
English
Publication Date:
May 1, 2001
ISBN/ISSN:
9781451849592/1018-5941
Stock No:
WPIEA0742001
Pages:
31
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