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Fiscal policy and inflation volatility

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  • Rother, Philipp

Abstract

Among the harmful effects of inflation, the negative consequences of inflation volatility are of particular concern. These include higher risk premia, hedging costs and unforeseen redistribution of wealth. This paper presents panel estimations for a sample of OECD countries which suggest that activist fiscal policies may have an important impact on CPI inflation volatility. Major results are robust for unconditional and conditional inflation volatility, the latter derived from country-specific GARCH models, and across different data frequencies, time periods and econometric methodologies. From a policy perspective, these results point to the possibility of further destabilising effects of discretionary fiscal policies, in addition to their potential to destabilise output. JEL Classification: E31, E62

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Paper provided by European Central Bank in its series Working Paper Series with number 0317.

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Date of creation: Mar 2004
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Handle: RePEc:ecb:ecbwps:20040317

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Keywords: Fiscal Policy; inflation volatility;

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Citations

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Cited by:
  1. Merkl, Christian & Schmitz, Tom, 2011. "Macroeconomic volatilities and the labor market: First results from the euro experiment," European Journal of Political Economy, Elsevier, vol. 27(1), pages 44-60, March.
  2. Haider, Adnan & Khan, Safdar Ullah, 2007. "Does Volatility in Government Borrowing Leads to Higher Inflation? Evidence from Pakistan," MPRA Paper 17008, University Library of Munich, Germany.
  3. Sacchi, Agnese & Salotti, Simone, 2014. "The impact of national fiscal rules on the stabilisation function of fiscal policy," MPRA Paper 56982, University Library of Munich, Germany.
  4. Szilard Erhart & Harmen Lehment & Jose Vasquez Paz, 2010. "Monetary policy committee size and inflation volatility," International Economics and Economic Policy, Springer, vol. 7(4), pages 411-421, December.
  5. Francisco José Veiga & Ari Aisen, 2006. "Political Instability and Inflation Volatility," IMF Working Papers 06/212, International Monetary Fund.
  6. Breuss, Fritz & Roeger, Werner, 2005. "The SGP fiscal rule in the case of sluggish growth: Simulations with the QUEST model," Journal of Policy Modeling, Elsevier, vol. 27(7), pages 767-788, October.
  7. Talpos, Ioan & Dima, Bogdan & Mutascu, Mihai, 2006. "The Fiscal Policy And The Stability Of The Nominal Sector: The Romanian Case," MPRA Paper 5689, University Library of Munich, Germany.
  8. Vratislav Izák, 2005. "Fiscal Deficits and Inflation in the Transition Countries," Prague Economic Papers, University of Economics, Prague, vol. 2005(1), pages 3-16.
  9. Harald Badinger, 2006. "Fiscal shocks, output dynamics and macroeconomic stability: an empirical assessment for Austria (1983–2002)," Empirica, Springer, vol. 33(5), pages 267-284, December.
  10. David Fielding, 2010. "Non-monetary Determinants of Inflation Volatility: Evidence from Nigeria," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 19(1), pages 111-139, January.
  11. Nawaz, Muhammad & Iqbal, Muhammad Mazhar & Ali, Amanat & Zaman, Khalid, 2012. "Fiscal Theory of Price Level: A Panel Data Analysis for selected Saarc Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 152-170, September.

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