Does governance matter for the public debt–inflation relationship in developed countries? Panel quantile regression approach

Nguyen Van Bon

Annals of Public and Cooperative Economics, 2022, vol. 93, issue 4, 1153-1173

Abstract: Similar to most countries in the world, developed countries also run the economy in the direction of fiscal deficits. Borrowing is one of the solutions for budget deficits, which causes public debt to increase in these countries. Does high public debt increase inflation, and what is the role of governance in the public debt–inflation relationship? For these research questions, this study uses a panel quantile regression approach, the two‐step GMM (Generalized Method of Moments) Arellano–Bond estimator, and the FE‐IV (Fixed‐Effect Instrumental Variable) estimator to investigate empirically the effects of public debt, governance, and their interaction on inflation for a group of 34 developed countries from 2002 to 2019. The results show that public debt and governance reduce inflation, but their interaction stimulates it. These findings suggest some important policy implications on better governance for governments in developed countries to keep inflation at a low rate.

Date: 2022
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