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Fiscal policy and inflation expectations

Author

Listed:
  • Miguel Mello

    (Banco Central del Uruguay)

  • Jorge Ponce

    (Banco Central del Uruguay)

Abstract

We find empirical evidence of a positive correlation between the budget deficit to GDP and inflation expectations of price setters in Uruguay. It implies an interdependence between fiscal and monetary policies: monetary policy faces more challenges to maintain inflation expectation anchored when the fiscal outcome worsen. The result is robust to considering other fiscal variables and to controlling for macroeconomic covariates. During the period under analysis, however, monetary policy has been effective to compensate the distortions introduced by fiscal policy on inflation expectations.

Suggested Citation

  • Miguel Mello & Jorge Ponce, 2020. "Fiscal policy and inflation expectations," Documentos de trabajo 2020004, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2020004
    as

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    File URL: https://www.bcu.gub.uy/Estadisticas-e-Indicadores/Documentos%20de%20Trabajo/4.2020.pdf
    File Function: First version, 2020
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    References listed on IDEAS

    as
    1. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    2. Carlos De Resende, 2007. "Cross-Country Estimates of the Degree of Fiscal Dominance and Central Bank Independence," Staff Working Papers 07-36, Bank of Canada.
    3. Gerardo Licandro & Miguel Mello, 2014. "Firm Inflation Expectations and Monetary Policy in Uruguay," Documentos de trabajo 2014006, Banco Central del Uruguay.
    4. Olivier Coibion & Yuriy Gorodnichenko & Saten Kumar, 2018. "How Do Firms Form Their Expectations? New Survey Evidence," American Economic Review, American Economic Association, vol. 108(9), pages 2671-2713, September.
    5. Fernando Borraz & Laura Zacheo, 2018. "Inattention, Disagreement and Internal (In)Consistency of Inflation Forecasts," Documentos de trabajo 2018007, Banco Central del Uruguay.
    6. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    7. Fernando Borraz & Miguel Mello, 2020. "Communication, Information and Inflation Expectations," Documentos de trabajo 2020005, Banco Central del Uruguay.
    8. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    9. Gerardo Licandro & Leonardo Vicente, 2006. "Incentivos fiscales e inconsistencia temporal: Uruguay 1970-2005," Documentos de trabajo 2006001, Banco Central del Uruguay, revised 13 Sep 2006.
    10. repec:pri:cepsud:161blinder is not listed on IDEAS
    11. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Carotta, Gianni & Mello, Miguel & Ponce, Jorge, 2023. "Monetary policy communication and inflation expectations: New evidence about tone and readability," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(3).
    2. Diego Labat & Gerardo Licandro, 2021. "Towards a quality currency," Documentos de trabajo 2021005, Banco Central del Uruguay.

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    More about this item

    Keywords

    Inflation expectations; budget deficit; fiscal policy; monetary policy; Uruguay;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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