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Fiscal Determinants of Inflation: A Primer for the Middle East and North Africa

  • Ludvig Söderling
  • Domenico Fanizza
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    Many countries in the Middle East and North Africa (MENA) region have recently experienced surges in money growth that apparently have not generated significant inflationary pressures. Moreover, several MENA countries have followed monetary policy rules that according to standard monetary theory should have produced macroeconomic instability and possibly hyperinflation. We argue that the Fiscal Theory of the Price Level could usefully provide insights on these developments. Our main conclusion is that a sound fiscal position constitutes a necessary condition for macroeconomic stability whereas "sound" monetary policy is neither sufficient nor necessary. Hence, fiscal policy and public debt deserve particular attention for maintaining macroeconomic stability, by and large consistent with Fund policy advice to MENA countries.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/216.

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    Length: 13
    Date of creation: 01 Oct 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/216
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    1. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2001. "Prospective Deficits and the Asian Currency Crisis," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1155-1197, December.
    2. International Monetary Fund, 2004. "Financial Sector Development in the Middle East and North Africa," IMF Working Papers 04/201, International Monetary Fund.
    3. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-38.
    4. Daniel, Betty C., 2001. "The fiscal theory of the price level in an open economy," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 293-308, October.
    5. International Monetary Fund, 2002. "Tunisia’s Experience with Real Exchange Rate Targeting and the Transition to a Flexible Exchange Rate Regime," IMF Working Papers 02/190, International Monetary Fund.
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