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Fiscal Explanations for Inflation: Any Evidence from Transition Economies?

  • Komulainen, Tuomas



  • Pirttilä, Jukka



Recent arguments, motivated partly by the new fiscal theory of price level, suggest that fiscal deficits undermine price stability in transition economies. This paper addresses these claims by examining vector-autoregressive models of inflation for three crisis-hidden transition economies (Bulgaria, Romania and Russia). The results indicate that while fiscal deficits have increased inflation in Bulgaria to a certain extent, this has not been the case in Romania and Russia. Even in the Bulgarian case, the usual money aggregate has proven more influential to inflation than fiscal deficits. The analysis based on this method therefore suggests that monetary policy plays an influential role in inflation determination in these countries. In other words, inflationary financing of deficits, rather than deficits themselves, accounts for inflation.

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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 11/2000.

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Length: 59 pages
Date of creation: 06 Nov 2000
Date of revision:
Handle: RePEc:hhs:bofitp:2000_011
Contact details of provider: Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
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  1. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  2. Willem H. Buiter, 1999. "The Fallacy of the Fiscal Theory of the Price Level," NBER Working Papers 7302, National Bureau of Economic Research, Inc.
  3. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," NBER Working Papers 6471, National Bureau of Economic Research, Inc.
  4. Fischer, Stanley & Sahay, Ratna & Vegh, Carlos, 1996. "Stabilization and growth in transition economies: The early experience," MPRA Paper 20631, University Library of Munich, Germany.
  5. de Melo, Martha & Denizer, Cevdet & Gelb, Alan, 1996. "From plan to market : patterns of transition," Policy Research Working Paper Series 1564, The World Bank.
  6. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Carlo Cottarelli, 1998. "The Nonmonetary Determinants of Inflation: A Panel Data Study," IMF Working Papers 98/23, International Monetary Fund.
  8. Josef C. Brada & Ali M. Kutan, 2002. "The End of Moderate Inflation in Three Transition Economies?," William Davidson Institute Working Papers Series 433, William Davidson Institute at the University of Michigan.
  9. Marek Dabrowski, 1999. "Disinflation, Monetary Policy and Fiscal Constraints. Experience of the Countries in Transition," CASE Network Reports 0016, CASE-Center for Social and Economic Research.
  10. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1998. "Prospective deficits and the Asian currency crisis," Working Paper Series WP-98-5, Federal Reserve Bank of Chicago.
  11. Wolf, H.C., 1999. "Transition Strategies: Choices and Outcomes," Princeton Studies in International Economics 85, International Economics Section, Departement of Economics Princeton University,.
  12. Canzoneri, Matthew B & Cumby, Robert E & Diba, Behzad T, 2001. "Fiscal Discipline and Exchange Rate Systems," Economic Journal, Royal Economic Society, vol. 111(474), pages 667-90, October.
  13. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  14. Donal McGettigan, 2000. "Current Account and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union," IMF Occasional Papers 189, International Monetary Fund.
  15. John H. Cochrane, 2000. "Money as Stock: Price Level Determination with no Money Demand," NBER Working Papers 7498, National Bureau of Economic Research, Inc.
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