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Fiscal Deficits and Inflation in the Transition Countries

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  • Vratislav Izák

Abstract

The fiscal deficits in the majority of transition countries continue to deteriorate and pose risks for the sustainability of public finances in the longer time horizon. Due to short time span and data limitation (1993 - 2003) I concentrate on the short-run dynamics using fixed-effect model with panel data. I found a very small effects of fiscal deficits on inflation for the group of Visegrad countries (the Czech Republic, Hungary, Poland, Slovakia) with slightly better results after the exclusion of Poland. The perspective of adopting the euro in the horizon of several years has prevented until now the use of surprise inflation to reduce the real burden of servicing the increasing public debt. In the periods of social conflicts which are likely to characterize times of delayed fiscal reforms the temptation to resort to seignorage may become more stronger than nowadays.

Suggested Citation

  • Vratislav Izák, 2005. "Fiscal Deficits and Inflation in the Transition Countries," Prague Economic Papers, University of Economics, Prague, vol. 2005(1), pages 3-16.
  • Handle: RePEc:prg:jnlpep:v:2005:y:2005:i:1:id:249:p:3-16
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    References listed on IDEAS

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    1. Stanley Fischer & Ratna Sahay & Carlos A. Végh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
    2. Arratibel, Olga & Rodriguez-Palenzuela, Diego & Thimann, Christian, 2002. "Inflation dynamics and dual inflation in accession countries: a 'New Keynesian' perspective," Working Paper Series 0132, European Central Bank.
    3. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    4. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
    5. International Monetary Fund, 2004. "Czech Republic; Selected Issues and Statistical Appendix," IMF Staff Country Reports 04/3, International Monetary Fund.
    6. Annicchiarico, Barbara, 2003. "Government deficits, wealth effects and the price level in an optimizing model," Working Paper Series 285, European Central Bank.
    7. Backé, Peter, 2004. "Fiscal policy and inflation volatility," Working Paper Series 317, European Central Bank.
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    More about this item

    Keywords

    transition countries; inflation; fiscal deficits;

    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
    • 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

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