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The impact of the budget deficit on the currency and inflation in the transition economies

  • Petraq Milo

    ()

    (Economic Adviser to the Prime Minister of Albania Member of the Supervisory Board of the Bank of Albania)

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    This article investigates the causal linkage between budget deficit, monetary mass and inflation in the transition economies. It is focused on the impact of public expenditures growth on money supply growth, and it does not take in account the amount of budget deficit. We test the new hypothesis that inflation is primarily attributable to public finances imbalances. In our model, the money supply growth is function of budget deficit and GDP growth rate; and inflation is a function of money supply growth and budget deficits. We find a positive relationship between monetary financing of government deficits and money base growth in the case of Albania, Bulgaria, and Romania; public finance imbalances are the main cause of money creation and inflation in these countries.

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    File URL: http://www.cbcg.me/repec/cbk/journl/vol1no1-2.pdf
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    Article provided by Central bank of Montenegro in its journal Journal of Central banking Theory and Practice.

    Volume (Year): 1 (2012)
    Issue (Month): 1 ()
    Pages: 25-57

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    Handle: RePEc:cbk:journl:v:1:y:2012:i:1:p:25-57
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    1. Rudiger Dornbusch & Stanley Fischer, 1986. "Stopping Hyperinflations Past and Present," NBER Working Papers 1810, National Bureau of Economic Research, Inc.
    2. Vito Tanzi, 1993. "The Budget Deficit in Transition: A Cautionary Note," IMF Staff Papers, Palgrave Macmillan, vol. 40(3), pages 697-707, September.
    3. Bennett T. McCallum, 1982. "Are Bond-Financed Deficits Inflationary? A Ricardian Analysis," NBER Working Papers 0905, National Bureau of Economic Research, Inc.
    4. Giannaros, Demetrios S. & Kolluri, Bharat R., 1985. "Deficit spending, money, and inflation: Some international empirical evidence," Journal of Macroeconomics, Elsevier, vol. 7(3), pages 401-417.
    5. Blejer, Mario I. & Cheasty, Adrienne, 1988. "High inflation, heterodox stabilization, and fiscal policy," World Development, Elsevier, vol. 16(8), pages 867-881, August.
    6. Peter J. Montiel, 1989. "Empirical Analysis of High-Inflation Episodes in Argentina, Brazil, and Israel," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 527-549, September.
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