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What is the relationship between large deficits and inflation in industrialized countries?


  • Marco Bassetto
  • R. Andrew Butters


Examining industrialized countries, the authors find that large deficits are not associated with higher inflation contemporaneously, nor are they associated with the emergence of higher inflation in subsequent years. This finding suggests that countries that can afford large deficits have built solid reputations and institutions supporting a sound monetary policy and the reversion to a stable fiscal regime.

Suggested Citation

  • Marco Bassetto & R. Andrew Butters, 2010. "What is the relationship between large deficits and inflation in industrialized countries?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 83-100.
  • Handle: RePEc:fip:fedhep:y:2010:i:qiii:p:83-100:n:v.34no.3

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    References listed on IDEAS

    1. Isabelle Joumard & Makoto Minegishi & Christophe André & Chantal Nicq & Robert W. R. Price, 2008. "Accounting for One-off Operations when Assessing Underlying Fiscal Positions," OECD Economics Department Working Papers 642, OECD Publishing.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-472, May.
    3. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    4. Missale, Alessandro & Blanchard, Olivier Jean, 1994. "The Debt Burden and Debt Maturity," American Economic Review, American Economic Association, vol. 84(1), pages 309-319, March.
    5. Kenneth N. Kuttner & Adam S. Posen, 2001. "The Great Recession: Lessons for Macroeconomic Policy from Japan," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2), pages 93-186.
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    Cited by:

    1. R. Anton Braun & Tomoyuki Nakajima, 2011. "Making the Case for a Low Intertemporal Elasticity of Substitution," KIER Working Papers 788, Kyoto University, Institute of Economic Research.
    2. repec:red:issued:16-80 is not listed on IDEAS
    3. R. Anton Braun & Tomoyuki Nakajima, 2018. "Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 235-255, July.
    4. Gerhard Reitschuler & Rupert Sendlhofer, 2011. "Fiscal policy, trigger points and interest rates: Additional evidence from the U.S," Working Papers 2011-23, Faculty of Economics and Statistics, University of Innsbruck.

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