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Inflation and government budget constraint in Korea

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  • Byung Han Seo
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    Abstract

    The new classical theory of inflation implies that the choice between financing a given path of public spending through debt or tax (seigniorage) finance has no substantial effect on inflation. This paper tests this hypothesis for Korea by estimating a reduced-form relation between inflation, the monetary base, and central bank debt. The empirical evidence suggests that central bank debt carrying information on the expected future path of monetary policy has additional explanatory power for inflation, even after accounting for the effects of the monetary base. It also confirms the hypothesis that the rate of inflation is not significantly affected by the time path of central bank debt in the long run.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 96-03.

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    Date of creation: 1996
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    Handle: RePEc:fip:fedfpb:96-03

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    Keywords: Korea ; Inflation (Finance) ; Budget ; Fiscal policy ; Debt;

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