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Budget Deficits and Inflation: The Roles of Central Bank Independence and Financial Market Development

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  • Bilin Neyapti

Abstract

This article investigates the relationship between budget deficits and inflation with the view that the nature of this relationship depends on the characteristics of monetary and financial institutions. The main hypothesis is that budget deficits are especially inflationary when both the central bank is not independent and the financial market is not developed enough to contain inflationary expectations. The empirical analysis using a panel data that comprises 54 developed and less developed countries, with one to two decades of observations for each, supports this hypothesis. The findings are also robust to subsets of the sample. (JEL "E58", "H62") Copyright 2003 Western Economic Association International.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

Volume (Year): 21 (2003)
Issue (Month): 4 (October)
Pages: 458-475

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Handle: RePEc:bla:coecpo:v:21:y:2003:i:4:p:458-475

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Cited by:
  1. Seedwell Hove & Albert Touna Mama & Fulbert Tchana Tchana, 2011. "Do Monetary, Fiscal and Financial Institutions Really Matter for Inflation Targeting in Emerging Market Economies?," Working Papers 247, Economic Research Southern Africa.
  2. Kamal, Mona, 2010. "الإطار النظرى للتنسيق بين السياستين المالية والنقدية
    [The Theoretical Framework for the Coordination of Fiscal and Monetary Polices]
    ," MPRA Paper 26856, University Library of Munich, Germany.
  3. Hermann Sintim-Aboagye & David Tufte, 2006. "Central Bank Independence, Inflation Variability, and the Revenue Smoothing Hypothesis," International Advances in Economic Research, Springer, Springer, vol. 12(2), pages 147-160, May.
  4. Jácome, Luis I. & Vázquez, Francisco, 2008. "Is there any link between legal central bank independence and inflation? Evidence from Latin America and the Caribbean," European Journal of Political Economy, Elsevier, Elsevier, vol. 24(4), pages 788-801, December.
  5. Cristina Bodea, 2013. "Independent central banks, regime type, and fiscal performance: the case of post-communist countries," Public Choice, Springer, Springer, vol. 155(1), pages 81-107, April.
  6. Bilin Neyapti, 2009. "Performance of Monetary Institutions : Comparative Evidence," Departmental Working Papers, Bilkent University, Department of Economics 0902, Bilkent University, Department of Economics.
  7. Hermann Sintim-Aboagye, 2005. "Emerging Economies, Turnover Rates and Inflation Variability: A Comparison of Generalized Maximum Likelihood and SUR Models," Economic Change and Restructuring, Springer, Springer, vol. 38(2), pages 167-178, June.

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