The impact of the budget deficit on the currency and inflation in the transition economies

Petraq Milo ()
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Petraq Milo: Economic Adviser to the Prime Minister of Albania Member of the Supervisory Board of the Bank of Albania

Journal of Central Banking Theory and Practice, 2012, vol. 1, issue 1, 25-57

Abstract: This article investigates the causal linkage between budget deficit, monetary mass and inflation in the transition economies. It is focused on the impact of public expenditures growth on money supply growth, and it does not take in account the amount of budget deficit. We test the new hypothesis that inflation is primarily attributable to public finances imbalances. In our model, the money supply growth is function of budget deficit and GDP growth rate; and inflation is a function of money supply growth and budget deficits. We find a positive relationship between monetary financing of government deficits and money base growth in the case of Albania, Bulgaria, and Romania; public finance imbalances are the main cause of money creation and inflation in these countries.

Keywords: Public finance; Budget deficit; Exchange rate; Inflation; Transition economies (search for similar items in EconPapers)
JEL-codes: E5 E61 E62 H5 H6 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:cbk:journl:v:1:y:2012:i:1:p:25-57

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