The Link Between Fiscal Deficit and Inflation: Do public sector wages matter?
AbstractThis paper investigates the validity of the hypothesis that suggests there is a link between fiscal deficits and inflation in developing countries and further explores this link in the absence of public sector wage expenditure. Sri Lanka, a developing country with a persistent fiscal deficit, a large public sector and increasing inflation, has been chosen for the empirical study. An auto-regressive distributed lag (ARDL) model is employed in the analysis, using annual data from 1959 to 2008. The results suggest that, in the long run, a one percentage point increase in the ratio of the fiscal deficit to narrow money is associated with about an 11 percentage point increase in inflation. This link becomes weaker in the absence of the public sector wage expenditure. The overall inference is that inflation is not only a monetary phenomenon in Sri Lanka and public sector wage expenditure is a key factor in explaining the deficit-inflation relationship.
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Bibliographic InfoPaper provided by The Australian National University, Australia South Asia Research Centre in its series ASARC Working Papers with number 2012-14.
Date of creation: 2012
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Fiscal deficit; Inflation; Public sector wages; Auto regressive distributed lag models;
Find related papers by JEL classification:
- H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-16 (All new papers)
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