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Fiscal Determinants of Inflation

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  • Ludvig Söderling
  • Domenico Fanizza
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    Abstract

    Many countries in the Middle East and North Africa (MENA) region have recently experienced surges in money growth that apparently have not generated significant inflationary pressures. Moreover, several MENA countries have followed monetary policy rules that according to standard monetary theory should have produced macroeconomic instability and possibly hyperinflation. We argue that the Fiscal Theory of the Price Level could usefully provide insights on these developments. Our main conclusion is that a sound fiscal position constitutes a necessary condition for macroeconomic stability whereas "sound" monetary policy is neither sufficient nor necessary. Hence, fiscal policy and public debt deserve particular attention for maintaining macroeconomic stability, by and large consistent with Fund policy advice to MENA countries.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/216.

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    Length: 13
    Date of creation: 01 Oct 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/216

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    Related research

    Keywords: Prices; inflation; monetary policy; price level; money stock; money growth; money demand; macroeconomic stability; nominal interest rate; monetary fund; monetary policies; real money; money supply; price stability; money balances; monetary policy rules; income velocity of money; foreign currency; liquidity management; monetary theory; high inflation; central bank; monetary economics; monetary stance; inflationary pressures; monetary targets; relative price; monetary conditions; inflation targeting; monetary theories; low inflation; monetary reform; rate of inflation; monetary aggregates; inflationary impact; standard monetary models; tight monetary stance; moderate inflation; monetary growth; real interest rate;

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    1. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1999. "Prospective deficits and the asian currency crisis," Policy Research Working Paper Series 2174, The World Bank.
    2. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the Fiscal Theory of the Price Level," NBER Working Papers 7668, National Bureau of Economic Research, Inc.
    3. International Monetary Fund, 2002. "Tunisia's Experience with Real Exchange Rate Targeting and the Transition to a Flexible Exchange Rate Regime," IMF Working Papers 02/190, International Monetary Fund.
    4. International Monetary Fund, 2004. "Financial Sector Development in the Middle East and North Africa," IMF Working Papers 04/201, International Monetary Fund.
    5. Daniel, Betty C., 2001. "The fiscal theory of the price level in an open economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(2), pages 293-308, October.
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