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Are fiscal deficits inflationary?

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  • Lin, Hsin-Yi
  • Chu, Hao-Pang

Abstract

This paper applies the dynamic panel quantile regression (DPQR) model under the autoregressive distributional lag (ARDL) specification, and examines the deficit–inflation relationship in 91 countries from 1960 to 2006. The DPQR model estimates the impact of deficits on inflation at various inflation levels and allows for a dynamic adjustment with the ARDL specification. The empirical results show that the fiscal deficit has a strong impact on inflation in high-inflation episodes, and has a weak impact in low-inflation episodes. The results imply that fiscal consolidation would be more effective in price stabilization the higher the inflation rate is, and are consistent with the theoretical model of Catão and Terrones (2005).

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 214-233

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Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:214-233

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Autoregressive distributional lag; Dynamic panel data; Fiscal deficits; Inflation; Quantile regression;

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Cited by:
  1. Minea, Alexandru & Tapsoba, René, 2014. "Does inflation targeting improve fiscal discipline?," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 185-203.
  2. Jalil, Abdul & Tariq, Rabbia & Bibi, Nazia, 2014. "Fiscal deficit and inflation: New evidences from Pakistan using a bounds testing approach," Economic Modelling, Elsevier, vol. 37(C), pages 120-126.
  3. Khieu Van, Hoang, 2014. "Budget deficit, money growth and inflation: Empirical evidence from Vietnam," MPRA Paper 54488, University Library of Munich, Germany, revised 12 Feb 2014.
  4. Ayesha Mushtaq & Khalid Zaman, 2013. "Macroeconomic Factors Affecting Budget Deficit in Pakistan: A Time Series Analysis," Oeconomics of Knowledge, Saphira Publishing House, vol. 5(4), pages 17-33, October.

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