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Are fiscal deficits inflationary?

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  • Lin, Hsin-Yi
  • Chu, Hao-Pang

Abstract

This paper applies the dynamic panel quantile regression (DPQR) model under the autoregressive distributional lag (ARDL) specification, and examines the deficit–inflation relationship in 91 countries from 1960 to 2006. The DPQR model estimates the impact of deficits on inflation at various inflation levels and allows for a dynamic adjustment with the ARDL specification. The empirical results show that the fiscal deficit has a strong impact on inflation in high-inflation episodes, and has a weak impact in low-inflation episodes. The results imply that fiscal consolidation would be more effective in price stabilization the higher the inflation rate is, and are consistent with the theoretical model of Catão and Terrones (2005).

Suggested Citation

  • Lin, Hsin-Yi & Chu, Hao-Pang, 2013. "Are fiscal deficits inflationary?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 214-233.
  • Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:214-233
    DOI: 10.1016/j.jimonfin.2012.04.006
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    References listed on IDEAS

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    Cited by:

    1. Josh Ryan-Collins, 2015. "Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935-75," Economics Working Paper Archive wp_848, Levy Economics Institute.
    2. repec:eee:jebusi:v:93:y:2017:i:c:p:46-61 is not listed on IDEAS
    3. Sergey Pekarski, 2017. "Tight Money and the Sustainability of Public Debt," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 191-223, February.
    4. Napp, T.A. & Gambhir, A. & Hills, T.P. & Florin, N. & Fennell, P.S, 2014. "A review of the technologies, economics and policy instruments for decarbonising energy-intensive manufacturing industries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 30(C), pages 616-640.
    5. Dejan Živkov & Jovan Njegic & Marko Pecanac, 2014. "Bidirectional linkage between inflation and inflation uncertainty – the case of Eastern European countries," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 14(1-2), pages 124-139, December.
    6. Khieu Van, Hoang, 2014. "Budget deficit, money growth and inflation: Empirical evidence from Vietnam," MPRA Paper 54488, University Library of Munich, Germany, revised 12 Feb 2014.
    7. repec:nos:voprec:2017-09-1 is not listed on IDEAS
    8. Andini, Corrado & Andini, Monica, 2015. "A Note on Unemployment Persistence and Quantile Parameter Heterogeneity," IZA Discussion Papers 8819, Institute for the Study of Labor (IZA).
    9. Mohanty, Deepak & John, Joice, 2015. "Determinants of inflation in India," Journal of Asian Economics, Elsevier, vol. 36(C), pages 86-96.
    10. Dmitriev, Mikhail & Kersting, Erasmus K., 2016. "Inflation level and inflation volatility: A seigniorage argument," Economics Letters, Elsevier, vol. 147(C), pages 112-115.
    11. Michael F. Bleaney & Mo Tian & Lin Yin, 2017. "De Facto Exchange Rate Regime Classifications: An Evaluation," Open Economies Review, Springer, vol. 28(2), pages 369-382, April.
    12. Lin, Hsin-Yi, 2016. "Do quantitative monetary targets matter?," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 415-428.
    13. Jalil, Abdul & Tariq, Rabbia & Bibi, Nazia, 2014. "Fiscal deficit and inflation: New evidences from Pakistan using a bounds testing approach," Economic Modelling, Elsevier, vol. 37(C), pages 120-126.
    14. Ayesha Mushtaq & Khalid Zaman, 2013. "Macroeconomic Factors Affecting Budget Deficit in Pakistan: A Time Series Analysis," Oeconomics of Knowledge, Saphira Publishing House, vol. 5(4), pages 17-33, October.
    15. Lim Chia Yien & Hussin Abdullah & Muhammad Azam, 2017. "Granger Causality Analysis between Inflation, Debt and Exchange Rate: Evidence from Malaysia," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 7(1), pages 189-196, January.
    16. repec:eee:rujoec:v:3:y:2017:i:3:p:221-239 is not listed on IDEAS
    17. Minea, Alexandru & Tapsoba, René, 2014. "Does inflation targeting improve fiscal discipline?," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 185-203.

    More about this item

    Keywords

    Autoregressive distributional lag; Dynamic panel data; Fiscal deficits; Inflation; Quantile regression;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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