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Domestic Debt, Inflation And Economic Crises: A Panel Cointegration Application To Emerging And Developed Economies

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Author Info

  • BILDIRICI, Melike

    ()

  • ERSIN, Ozgur Omer

    ()

Abstract

The paper aims to investigate the economic relationship between inflation and domestic debt. In countries that experience high inflation, the inflationary process fed on increasing costs of domestic debt. As a result, the increasing debt to GDP ratios led these countries to borrow at higher interest rates and with lower maturity rates. The paper aims to divide countries into three groups. First group consists of Mexico, Turkey and Brazil; countries with high inflation experiences which result in increasing costs of domestic debt. Second group consists of Belgium, Canada and Japan, low inflation rates, low costs of borrowing. Third group consists of Portugal, Greece and Spain, countries with low inflation, high borrowing with low costs of borrowing and fiscal discipline. It is observed that, increasing costs of borrowing is epidemic to those with Non-Ricardian fiscal policies. As a result, it is not the rate of domestic debt/GDP ratio but the cost of borrowing and active fiscal regimes that lessens the immunity of emerging economies to the economic crises. Another important result that cannot be avoided is the fact that, FMOLS and DOLS methods followed in the study resulted in similar estimates for some countries, whereas we also observe very different estimates for others.

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Bibliographic Info

Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

Volume (Year): 7 (2007)
Issue (Month): 1 ()
Pages:

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Handle: RePEc:eaa:aeinde:v:7:y:2007:i:1_3

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Related research

Keywords: FTPL; Ricardian Equivalence; inflation and public debt; Panel Cointegration; Panel VAR; Panel VEC; FMOLS; DOLS;

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Cited by:
  1. Melike Bildirici & Özgür Ömer ERS?N & Elçin Aykaç ALP, 2008. "An Empirical Analysis of Debt Policies, External Dependence, Inflation and Crisis in the Ottoman Empire and Turkey: 1830-2005 Period," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 8(2), pages 79-100.

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