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Fiscal Deficits and Inflation: A New Look at the Emerging Market Evidence
Author:
Mr. Marco Terrones
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and
Mr. Luis Catão
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Series:
IMF Working Papers
Volume/Issue:
Volume 2001: Issue 074
Language:
English
Publication Date:
01 May 2001
DOI:
https://doi.org/10.5089/9781451849592.001
ISBN:
9781451849592
ISSN:
1018-5941
Pages:
31
Keywords:
WP; exchange rate; fiscal deficit; world inflation; Fiscal Policy; Inflation; Emerging Markets; deficit measure; narrow money; deficit-inflation relationship; deficit variable; oil price; deficit concept; PMGE estimate; Government debt management; Oil prices; Exchange rate arrangements; Interest payments; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund