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Fiscal Deficits and Inflation

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  • Marco Terrones
  • Luis Catão

Abstract

Empirical studies have had little success in finding a statistically significant relationship between fiscal deficits and inflation in broad cross-country panels. This paper provides new econometric estimates for a panel of 23 emerging market countries during 1970-2000. Unlike previous studies, we allow for a rich dynamic specification and focus on the long-run relationship between the two variables controlling for differences in the inflation tax base. We find that a 1 percentage point reduction in the ratio of fiscal deficit to GDP typically lowers long-run inflation by 1½ to 6 percentage points, depending on the size of the inflation tax base.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/74.

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Length: 31
Date of creation: 01 May 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/74

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Keywords: Emerging markets; inflation; inflation tax; monetary fund; inflation rates; inflation rate; high inflation; lower inflation; real value; monetary policy; demand for money; effects of inflation; central bank; money stock; price level; low inflation; money supply; monetary expansion; monetary economics; monetary dynamics; price inflation; quantity theory of money; measure of inflation; inflation dynamics; high inflations; quantity theory; foreign currency; rate of inflation; effect of inflation; reduction in inflation; high-inflation episodes; inflationary impact; theory of money; paper money; extreme inflation; money demand; fall in inflation; rising inflation; range of inflation; money balances; monetary discipline; price stability; inflation stabilization; real interest rates; nominal interest rates; monetary stability; moderate inflation; expansionary monetary policy;

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