Fiscal Regime in Least Developed Countries, Institutions and Implications for Monetary Policy

Lucius Cassim and Debdulal Mallick

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate whether public debt in least developed countries (LDCs) is serviced through fiscal adjustments or by triggering inflation. Using time series data from LDCs for the 1980-2023 period and employing the Bayesian structural vector auto-regressive model, we estimate the response of public liabilities to positive surplus shocks. We find support for the latter hypothesis of the Fiscal Theory of Price Level that these countries are characterized by non-Ricardian fiscal regimes. One important implication of our findings is that the conventional monetary policy may not be effective in stabilizing inflation in these countries. In contrast, when we replicate the same exercise for developed countries, we find support for the former hypothesis. We further explore the role of institutional development in explaining the fiscal (in)discipline in LDCs.

Keywords: Non-Ricardian fiscal regime; Fiscal theory of price level; Bayesian SVAR; Central bank; Monetary policy; Least developed countries; Institutions. (search for similar items in EconPapers)
JEL-codes: C11 C32 E02 E58 E62 E63 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:127592

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