Fiscal Deficits and Inflation

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...

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Bibliographic Details
Main Author: Catão, Luis
Other Authors: Terrones, Marco
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2003
Series:IMF Working Papers
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
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245 0 0 |a Fiscal Deficits and Inflation  |c Luis Catão, Marco Terrones 
260 |a Washington, D.C.  |b International Monetary Fund  |c 2003 
300 |a 33 pages 
651 4 |a United States 
653 |a Public finance & taxation 
653 |a Sovereign Debt 
653 |a Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General 
653 |a Energy: Demand and Supply 
653 |a Public financial management (PFM) 
653 |a Government debt management 
653 |a Deflation 
653 |a Budgeting 
653 |a Debt Management 
653 |a National Budget 
653 |a Budget Systems 
653 |a Prices 
653 |a Inflation 
653 |a Public Finance 
653 |a Debt 
653 |a Oil prices 
653 |a Macroeconomics 
653 |a Debts, Public 
653 |a Currency 
653 |a Foreign Exchange 
653 |a Budget 
653 |a Budgeting & financial management 
653 |a Foreign exchange 
653 |a Price Level 
653 |a Exchange rate arrangements 
653 |a Budget planning and preparation 
700 1 |a Terrones, Marco 
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520 |a 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