Fiscal Deficits and Inflation

By Luís A. V. Catão, Marco E. Terrones. Social Science Research Network, 2003

471 citations recorded by the source corpus.

Macroeconomic theory postulates that fiscal deficits cause inflation. Yet empirical research has had limited success in uncovering this relationship. This paper reexamines the issue in light of broader data and a new modeling approach that incorporates two key features of the theory. Unlike previous studies, we model inflation as nonlinearly related to fiscal deficits through the inflation tax base and estimate this relationship as intrinsically dynamic, using panel techniques that explicitly distinguish between short- and long-run effects of fiscal deficits. Results spanning 107 countries over 1960-2001 show a strong positive association between deficits and inflation among high-inflation and developing country groups, but not among low-inflation advanced economies.

View Paper: https://www.semanticscholar.org/paper/3bddb09b75b0a831fa4472d4a29bd10df352014c

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Citations in the corpus

Inflation, openness, and exchange-rate regimes: The quest for short-term commitment (2004, background): “…in panel Algeria (1,2), Angola (1), Argentina (1,2), Australia (1,2), Bahamas (1), Bahrain (1,2), Bangladesh (1,2), Barbados (1,2), Belgium (1,2), Belize (1,2), Benin (1,2), Bolivia (1,2), Botswana (1,2), Brazil (1,2), Bukina Faso (1,2), Burundi (1,2), Cameroon (1,2), Canada (1,2), Cape Verde Is.”
Central Bank Independence and Monetary Policymaking Institutions - Past Present and Future (2008, background): “Recent extensive international evidence in Catao and Terrones (2005) supports the view that developing economies display a significant positive long-run association between inflation and deficits scaled by narrow money.”
Effects of fiscal deficit and money M2 supply on inflation: Evidence from selected economies of Asia (2015, unknown): “(2002), Catão and Terrones (2005), Lin and Chu (2013) and Jayaraman and Chen (2013) found fiscal deficit has strongly positive influence on inflation and Nassar (2005), Oomes and Ohnsorge (2005), Pelipas (2006) and Hossain (2010) confirmed broad money supply are positively correlated with inflation.”
Any Link between Legal Central Bank Independence and Inflation?: Evidence from Latin America and the Caribbean (2005, unknown): “, 2002), although a recent study suggests otherwise (Catao and Terrones, 2003).”
Public debt and financial development (2009, background): “…has also dealt with indirect effects of fiscal policy on financial development: financial repression and inflation, two main foes of financial development, have been shown to be rooted in fiscal problems (Bencivenga and Smith, 1992; Roubini and Sala-i-Martin, 1992; Catão and Terrones, 2005).”