The Impact of Fiscal Policy on Inflation Expectations

Francisco Arizala, Santiago Bazdresch, Tomohide Mineyama and Shiqing Hua

No 2025/231, IMF Working Papers from International Monetary Fund

Abstract: This paper analyzes the impact of fiscal policy on inflation expectations across a large sample of advanced economies (AEs) and emerging market economies (EMs). We identify episodes of significant fiscal adjustment using both quantitative thresholds and a narrative approach and find that such episodes are associated with statistically significant changes in inflation expectations in EMs while the responses are muted in AEs. We also document that the relationship between fiscal policy and inflation expectations is more pronounced in high-inflation environments and under weak fiscal positions. Additionally, we explore how market perceptions of sovereign risk, as well as monetary and exchange rate frameworks, influence the transmission of fiscal policy to inflation expectations. Our empirical results suggest that it is especially important for EMs to implement prudent fiscal policy as it may help reduce inflationary pressures and inflation expectations.

Keywords: Fiscal Policy; Fiscal Consolidations; Inflation Expectations; Narrative Approach; inflation expectation; IMF working papers; prudent fiscal policy; emerging market economies; impact of fiscal policy; Shiqing Hua; Inflation; Fiscal stance; Fiscal consolidation; Fiscal stimulus; Africa (search for similar items in EconPapers)
Pages: 23
Date: 2025-11-07
New Economics Papers: this item is included in nep-cba, nep-inv, nep-mon and nep-opm
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