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Fiscal Deficits and Inflation: A New Look At the Emerging Market Evidence

  • Marco Terrones
  • Luis Catão

Empirical studies have had little success in finding a statistically significant relationship between fiscal deficits and inflation in broad cross-country panels. This paper provides new econometric estimates for a panel of 23 emerging market countries during 1970-2000. Unlike previous studies, we allow for a rich dynamic specification and focus on the long-run relationship between the two variables controlling for differences in the inflation tax base. We find that a 1 percentage point reduction in the ratio of fiscal deficit to GDP typically lowers long-run inflation by 1½ to 6 percentage points, depending on the size of the inflation tax base.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/74.

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Length: 31
Date of creation: 01 May 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/74
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  1. Marta Campillo & Jeffrey A. Miron, 1996. "Why Does Inflation Differ Across Countries?," NBER Working Papers 5540, National Bureau of Economic Research, Inc.
  2. Pesaran, M.H., 1996. "The Role of Economic Theory in Modelling the Long Run," Cambridge Working Papers in Economics 9612, Faculty of Economics, University of Cambridge.
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  7. Pesaran, M. H. & Shin, Y. & Smith, R. P., 1997. "Pooled Estimation of Long-run Relationships in Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9721, Faculty of Economics, University of Cambridge.
  8. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does the Nominal Exchange Rate Regime Matter?," NBER Working Papers 5874, National Bureau of Economic Research, Inc.
  9. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  10. David William Harold Orsmond & Stanley Fischer, 2000. "Israeli Inflation From An International Perspective," IMF Working Papers 00/178, International Monetary Fund.
  11. Thomas J. Sargent, 1982. "The Ends of Four Big Inflations," NBER Chapters, in: Inflation: Causes and Effects, pages 41-98 National Bureau of Economic Research, Inc.
  12. Guillermo A. Calvo & Carlos A. Vegh, 1999. "Inflation Stabilization and BOP Crises in Developing Countries," NBER Working Papers 6925, National Bureau of Economic Research, Inc.
  13. Metin, Kivilcim, 1998. "The Relationship between Inflation and the Budget Deficit in Turkey," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 412-22, October.
  14. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
  15. Franco, Gustavo H B, 1990. "Fiscal Reforms and Stabilisation: Four Hyperinflation Cases Examined," Economic Journal, Royal Economic Society, vol. 100(399), pages 176-87, March.
  16. King, Robert G. & Plosser, Charles I., 1985. "Money, deficits, and inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 147-195, January.
  17. Haan, Jakob de & Kooi, Willem J., 2000. "Does central bank independence really matter?: New evidence for developing countries using a new indicator," Journal of Banking & Finance, Elsevier, vol. 24(4), pages 643-664, April.
  18. Prakash Loungani & Phillip Swagel, 2001. "Sources of Inflation in Developing Countries," IMF Working Papers 01/198, International Monetary Fund.
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