IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/2004317.html
   My bibliography  Save this paper

Fiscal policy and inflation volatility

Author

Listed:
  • Backé, Peter

Abstract

Among the harmful effects of inflation, the negative consequences of inflation volatility are of particular concern. These include higher risk premia, hedging costs and unforeseen redistribution of wealth. This paper presents panel estimations for a sample of OECD countries which suggest that activist fiscal policies may have an important impact on CPI inflation volatility. Major results are robust for unconditional and conditional inflation volatility, the latter derived from country-specific GARCH models, and across different data frequencies, time periods and econometric methodologies. From a policy perspective, these results point to the possibility of further destabilising effects of discretionary fiscal policies, in addition to their potential to destabilise output. JEL Classification: E31, E62

Suggested Citation

  • Backé, Peter, 2004. "Fiscal policy and inflation volatility," Working Paper Series 317, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2004317
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp317.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
    2. John H. Cochrane, 1999. "A Frictionless View of U.S. Inflation," NBER Chapters,in: NBER Macroeconomics Annual 1998, volume 13, pages 323-421 National Bureau of Economic Research, Inc.
    3. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
    4. 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.
    5. Marcellino, Massimiliano, 2006. "Some stylized facts on non-systematic fiscal policy in the Euro area," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 461-479, September.
    6. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    7. Carlo A. Favero, "undated". "How do European monetary and fiscal authorities behave?," Working Papers 214, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    8. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
    9. Fahim Al-Marhubi, 1998. "Cross-country evidence on the link between inflation volatility and growth," Applied Economics, Taylor & Francis Journals, vol. 30(10), pages 1317-1326.
    10. Melitz, Jacques, 1997. "Some Cross-Country Evidence about Debt, Deficits and the Behaviour of Monetary and Fiscal Authorities," CEPR Discussion Papers 1653, C.E.P.R. Discussion Papers.
    11. Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 2002. "Fiscal Policy, Profits, and Investment," American Economic Review, American Economic Association, vol. 92(3), pages 571-589, June.
    12. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Economics Working Papers 015, European Network of Economic Policy Research Institutes.
    13. 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.
    14. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2001. "Monetary and Fiscal Policy Interactions over the Cycle: Some Empirical Evidence," Working Papers 2002_13, Business School - Economics, University of Glasgow, revised Oct 2002.
    15. Marco Terrones & Luis Catão, 2001. "Fiscal Deficits and Inflation; A New Look at the Emerging Market Evidence," IMF Working Papers 01/74, International Monetary Fund.
    16. Judson, Ruth & Orphanides, Athanasios, 1999. "Inflation, Volatility and Growth," International Finance, Wiley Blackwell, vol. 2(1), pages 117-138, April.
    17. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    18. Froyen, Richard T & Waud, Roger N, 1987. "An Examination of Aggregate Price Uncertainty in Four Countries and Some Implications for Real Output," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 353-372, June.
    19. Marta Campillo & Jeffrey A. Miron, 1997. "Why Does Inflation Differ across Countries?," NBER Chapters,in: Reducing Inflation: Motivation and Strategy, pages 335-362 National Bureau of Economic Research, Inc.
    20. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
    21. Roberto Perotti, 2005. "Estimating the effects of fiscal policy in OECD countries," Proceedings, Federal Reserve Bank of San Francisco.
    22. António Afonso, 2002. "Disturbing the Fiscal Theory of the Price Level: Can it Fit the EU-15," Working Papers Department of Economics 2002/01, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    23. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2002. "Should the European Central Bank and the Federal Reserve be concerned about fiscal policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 333-389.
    24. Bouthevillain, C. & Van Den Dool, G. & Langenus, G. & Mohr, M. & Momigliano, S. & Tujula, M. & De Cos, P.H. & Cour-Thimann, Philippine, 2001. "Cyclically Adjusted Budget Balances: an Alternative Approach," Papers 77, Quebec a Montreal - Recherche en gestion.
    25. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.
    26. Perotti, Roberto, 2002. "Estimating the effects of fiscal policy in OECD countries," Working Paper Series 0168, European Central Bank.
    27. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
    28. repec:hrv:faseco:3353756 is not listed on IDEAS
    29. Neumann, Manfred J M & von Hagen, Jurgen, 1991. "Conditional Relative Price Variance and Its Determinants: Open Economy Evidence from Germany," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 195-208, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. António Afonso & João Tovar Jalles, 2017. "Fiscal Activism and Price Volatility: Evidence from Advanced and Emerging Economies," Working Papers Department of Economics 2017/04, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    2. Talpos, Ioan & Dima, Bogdan & Mutascu, Mihai, 2006. "The Fiscal Policy And The Stability Of The Nominal Sector: The Romanian Case," MPRA Paper 5689, University Library of Munich, Germany.
    3. S. Adnan & H.A.S. BUKHARI & Safdar Ullah KHAN, 2008. "Does Volatility In Government Borrowing Leads To Higher Inflation? Evidence From Pakistan," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 187-202.
    4. Sacchi, Agnese & Salotti, Simone, 2015. "The impact of national fiscal rules on the stabilisation function of fiscal policy," European Journal of Political Economy, Elsevier, vol. 37(C), pages 1-20.
    5. Szilard Erhart & Harmen Lehment & Jose Vasquez Paz, 2010. "Monetary policy committee size and inflation volatility," International Economics and Economic Policy, Springer, vol. 7(4), pages 411-421, December.
    6. Merkl, Christian & Schmitz, Tom, 2011. "Macroeconomic volatilities and the labor market: First results from the euro experiment," European Journal of Political Economy, Elsevier, vol. 27(1), pages 44-60, March.
    7. Ari Aisen & Francisco Veiga, 2008. "Political instability and inflation volatility," Public Choice, Springer, vol. 135(3), pages 207-223, June.
    8. David Fielding, 2010. "Non-monetary Determinants of Inflation Volatility: Evidence from Nigeria," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 19(1), pages 111-139, January.
    9. Harald Badinger, 2006. "Fiscal shocks, output dynamics and macroeconomic stability: an empirical assessment for Austria (1983–2002)," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 33(5), pages 267-284, December.
    10. Vratislav Izák, 2005. "Fiscal Deficits and Inflation in the Transition Countries," Prague Economic Papers, University of Economics, Prague, vol. 2005(1), pages 3-16.
    11. Breuss, Fritz & Roeger, Werner, 2005. "The SGP fiscal rule in the case of sluggish growth: Simulations with the QUEST model," Journal of Policy Modeling, Elsevier, vol. 27(7), pages 767-788, October.
    12. Wolassa Lawisso Kumo, 2015. "Working Paper - 216 - Inflation Targeting Monetary Policy, Inflation Volatility and Economic Growth in South Africa," Working Paper Series 2154, African Development Bank.
    13. Nawaz, Muhammad & Iqbal, Muhammad Mazhar & Ali, Amanat & Zaman, Khalid, 2012. "Fiscal Theory of Price Level: A Panel Data Analysis for selected Saarc Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 152-170, September.

    More about this item

    Keywords

    fiscal policy; inflation volatility;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:2004317. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications). General contact details of provider: http://edirc.repec.org/data/emieude.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.