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Fiscal Explanations for Inflation: Any Evidence from Transition Economies?

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Author Info
Komulainen, Tuomas () (BOFIT)
Pirttilä, Jukka () (BOFIT)

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Abstract

Recent arguments, motivated partly by the new fiscal theory of price level, suggest that fiscal deficits undermine price stability in transition economies. This paper addresses these claims by examining vector-autoregressive models of inflation for three crisis-hidden transition economies (Bulgaria, Romania and Russia). The results indicate that while fiscal deficits have increased inflation in Bulgaria to a certain extent, this has not been the case in Romania and Russia. Even in the Bulgarian case, the usual money aggregate has proven more influential to inflation than fiscal deficits. The analysis based on this method therefore suggests that monetary policy plays an influential role in inflation determination in these countries. In other words, inflationary financing of deficits, rather than deficits themselves, accounts for inflation.

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Publisher Info
Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 11/2000.

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Length: 59 pages
Date of creation: 06 Nov 2000
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Handle: RePEc:hhs:bofitp:2000_011

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Keywords: fiscal policy inflation vector autoregressive models transition economies

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Josef C. Brada & Ali M. Kutan, 1999. "The end of moderate inflation in three transition economies?," Working Papers 1999-003, Federal Reserve Bank of St. Louis. [Downloadable!]
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  2. Fischer, Stanley & Sahay, Ratna & Vegh, Carlos A, 1996. "Stabilization and Growth in Transition Economies: The Early Experience," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 45-66, Spring. [Downloadable!] (restricted)
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  3. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," NBER Working Papers 6471, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. John H. Cochrane, 2000. "Money as Stock: Price Level Determination with no Money Demand," NBER Working Papers 7498, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
  6. Wolf, H.C., 1999. "Transition Strategies: Choices and Outcomes," Princeton Studies in International Economics 85, International Economics Section, Departement of Economics Princeton University,.
  7. Willem H. Buiter, 1999. "The Fallacy of the Fiscal Theory of the Price Level," NBER Working Papers 7302, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September. [Downloadable!] (restricted)
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  9. Burnside, C. & Eichenbaum, M. & Rebelo, S., 1998. "Prospective Deficits and the Asian Currency Crisis," RCER Working Papers 458, University of Rochester - Center for Economic Research (RCER).
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  10. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  11. Donal McGettigan, 2000. "Current Account and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union," IMF Occasional Papers 189, International Monetary Fund.
  12. de Melo, Martha & Denizer, Cevdet & Gelb, Alan, 1996. "From plan to market : patterns of transition," Policy Research Working Paper Series 1564, The World Bank. [Downloadable!]
  13. Carlo Cottarelli, 1998. "The Nonmonetary Determinants of Inflation - A Panel Data Study," IMF Working Papers 98/23, International Monetary Fund.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Järvinen, Marketta, 2002. "Exchange rate regimes and nominal convergence in the CEECs," BOFIT Discussion Papers 4/2002, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  2. Michael Berlemann & Kalina Dimitrova & Nikolay Nenovsky, 2000. "Assessing Market Expectations on Exchange Rates and Inflation: A Pilot Forecasting System for Bulgaria," William Davidson Institute Working Papers Series wp759, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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