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

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  • Mr. Luis Catão
  • Mr. Marco Terrones

Abstract

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.

Suggested Citation

  • Mr. Luis Catão & Mr. Marco Terrones, 2001. "Fiscal Deficits and Inflation: A New Look at the Emerging Market Evidence," IMF Working Papers 2001/074, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2001/074
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    Cited by:

    1. 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.
    2. El-Sakka M. I. T. & Ghali Khalifa H, 2005. "The Sources of Inflation in Egypt: A Multivariate Co-integration Analysis," Review of Middle East Economics and Finance, De Gruyter, vol. 3(3), pages 84-96, December.
    3. Ilker Domaç & Eray M. Yücel, 2005. "What Triggers Inflation in Emerging Market Economies?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(1), pages 141-164, April.
    4. 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.
    5. Raghbendra Jha, 2007. "Fiscal Policy in Developing Countries: A Synoptic View," ASARC Working Papers 2007-01, The Australian National University, Australia South Asia Research Centre.
    6. Martina Alexová, 2012. "What determines inflation?," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 5(4), pages 345-369.
    7. Albert Makochekanwa, 2011. "Impact of Budget Deficit on Inflation in Zimbabwe," Economic Research Guardian, Weissberg Publishing, vol. 1(2), pages 49-59, December.
    8. Henry, Jérôme & Hernández de Cos, Pablo & Momigliano, Sandro, 2004. "The short-term impact of government budgets on prices: evidence from macroeconomic models," Working Paper Series 396, European Central Bank.
    9. Jean-Louis COMBES & Tahsin SAADI SEDIK, 2002. "How does Trade openness Influence Budget Deficits?," Working Papers 200209, CERDI.
    10. Backé, Peter, 2004. "Fiscal policy and inflation volatility," Working Paper Series 317, European Central Bank.
    11. Jean-Louis Combes & Tahsin Saadi-Sedik, 2006. "How does trade openness influence budget deficits in developing countries?," Journal of Development Studies, Taylor & Francis Journals, vol. 42(8), pages 1401-1416.
    12. Jerome Henry & Pablo Hernandez de Cos & Sandro Momigliano, 2004. "The short-term impact of government budgets on prices; evidence from macroeconometric models," Temi di discussione (Economic working papers) 523, Bank of Italy, Economic Research and International Relations Area.
    13. Ilker Domac, 2003. "Explaining and Forecasting Inflation in Turkey," Working Papers 0306, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    14. Henry, Jerome & Hernandez de Cos, Pablo & Momigliano, Sandro, 2008. "The impact of government budgets on prices: Evidence from macroeconometric models," Journal of Policy Modeling, Elsevier, vol. 30(1), pages 123-143.
    15. Atilla Gökçe & Umut Ãakmak, 2016. "Long-Term Relationship between Inflation and Public Sector Deficit in the Turkish Economy and its Macroeconomic Implications (1975-2014)," Journal of Economics and Behavioral Studies, AMH International, vol. 8(4), pages 109-122.
    16. Jose Saboin, 2018. "The Modern Hyperinflation Cycle: Some New Empirical Regularities," IMF Working Papers 2018/266, International Monetary Fund.
    17. 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.
    18. Jeannine Bailliu & Daniel Garcés & Mark Kruger & Miguel Messmacher, 2003. "Explaining and Forecasting Inflation in Emerging Markets: The Case of Mexico," Staff Working Papers 03-17, Bank of Canada.

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