The Effects of Inflation on Public Finances

May 5, 2023

Preview Citation

Format: Chicago

Daniel Garcia-Macia. The Effects of Inflation on Public Finances, (USA: International Monetary Fund, 2023) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Does inflation help improve public finances? This paper documents the dynamic responses of fiscal variables to an inflation shock, using both quarterly and annual panel data for a broad set of economies. Inflation shocks are estimated to improve fiscal balances temporarily, as nominal revenues track inflation closely, while nominal primary expenditures take longer to catch up. Inflation spikes also lead to a persistent reduction in debt to GDP ratios, both due to the primary balance improvement and the nominal GDP denominator channel. However, debt only falls with inflation surprises—rises in inflation expectations do not improve debt dynamics, suggesting limits to debt debasement strategies. The results are robust to using various inflation measures and instrumental variables.

Subject: 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

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/093
Stock No:

WPIEA2023093
ISBN:

9798400241529
ISSN:

1018-5941

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