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A Note On Inflation Dynamics, Price Volatility, And Fiscal Activism

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  • Afonso, António
  • Jalles, João Tovar

Abstract

Using a panel of 54 countries between 1980 and 2013, we find empirical support for the view that changes in the fiscal policy stance (year-on-year change in the cyclically adjusted primary balance) have a significant positive correlation with inflation volatility. An increase in the volatility of discretionary fiscal policies by one standard deviation raises inflation volatility by about 6%. Moreover, results using alternative inflation volatility proxies confirm that an expansionary fiscal stance increases price volatility. Another relevant outcome is that in a context of economic expansions (recessions) the harmful impact of fiscal activism on price volatility is soft (heightened), while the negative impact of fiscal activism on price stability is higher when fiscal policy is expansionary. Finally, fiscal activism fuels inflation volatility much more pronouncedly in emerging market economies vis-à-vis advanced economies.

Suggested Citation

  • Afonso, António & Jalles, João Tovar, 2020. "A Note On Inflation Dynamics, Price Volatility, And Fiscal Activism," Macroeconomic Dynamics, Cambridge University Press, vol. 24(5), pages 1299-1313, July.
    • Handle: RePEc:cup:macdyn:v:24:y:2020:i:5:p:1299-1313_11
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    Cited by:

    1. António Afonso & José Alves & Olegs Matvejevs & Olegs Tkacevs, 2023. "Fiscal Sustainability and the Role of Inflation," Working Papers REM 2023/0303, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    2. Ablam Estel Apeti & Bao-We-Wal Bambe & Jean-Louis Combes & Eyah Denise Edoh, 2023. "Original Sin: Fiscal Rules and Government Debt in Foreign Currency in Developing Countries," Working Papers hal-04130477, HAL.
    3. Clement Olalekan Olaniyi, 2020. "Application of Bootstrap Simulation and Asymmetric Causal Approach to Fiscal Deficit-Inflation Nexus," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 12(2), pages 123-140, May.

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