IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/06-121.html
   My bibliography  Save this paper

Public Debt, Money Supply, and Inflation; A Cross-Country Study and Its Application to Jamaica

Author

Listed:
  • Goohoon Kwon
  • Lavern McFarlane
  • Wayne Robinson

Abstract

This paper provides comprehensive empirical evidence that supports the predictions of Sargent and Wallace's (1981) "unpleasant monetarist arithmetic" that an increase in public debt is typically inflationary in countries with large public debt. Drawing on an extensive panel dataset, we find that the relationship holds strongly in indebted developing countries, weakly in other developing countries, but generally not in developed economies. These results are robust to the inclusion of other variables, corrections for endogeneity biases, and relaxation of common-slope restrictions and are invariant over sub-sample periods. We estimate a VAR to trace out the transmission channel and find the impulse responses consistent with the predictions of a forward-looking model of inflation. Wealth effects of public debt could also affect inflation, as posited by the fiscal theory of the price level, but we do not find supportive evidence. The results suggest that the risk of a debt-inflation trap is significant in highly indebted countries, and pure money-based stabilization is unlikely to be effective over the medium term. Our findings stress the importance of institutional and structural factors in the link between fiscal policy and inflation.

Suggested Citation

  • Goohoon Kwon & Lavern McFarlane & Wayne Robinson, 2006. "Public Debt, Money Supply, and Inflation; A Cross-Country Study and Its Application to Jamaica," IMF Working Papers 06/121, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/121
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=19133
    Download Restriction: no

    Citations

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


    Cited by:

    1. Anoop Singh, 2006. "Macroeconomic Volatility; The Policy Lessons from Latin America," IMF Working Papers 06/166, International Monetary Fund.
    2. International Monetary Fund, 2008. "Jamaica; Selected Issues," IMF Staff Country Reports 08/198, International Monetary Fund.
    3. Judit Krekó & Csaba Balogh & Kristóf Lehmann & Róbert Mátrai & György Pulai & Balázs Vonnák, 2013. "International experiences and domestic opportunities of applying unconventional monetary policy tools," MNB Occasional Papers 2013/100, Magyar Nemzeti Bank (Central Bank of Hungary).
    4. Pedro Teles & Harald Uhlig & João Valle e Azevedo, 2016. "Is Quantity Theory Still Alive?," Economic Journal, Royal Economic Society, vol. 126(591), pages 442-464, March.
    5. International Monetary Fund, 2006. "Jamaica; Selected Issues," IMF Staff Country Reports 06/157, International Monetary Fund.
    6. José Augusto Lopes da Veiga & Alexandra Ferreira-Lopes & Tiago Neves Sequeira, 2016. "Public Debt, Economic Growth and Inflation in African Economies," South African Journal of Economics, Economic Society of South Africa, vol. 84(2), pages 294-322, June.

    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:imf:imfwpa:06/121. 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: (Jim Beardow) or (Hassan Zaidi). General contact details of provider: http://edirc.repec.org/data/imfffus.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.

    We have no references for this item. You can help adding them by using 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.