Short- and medium-term fiscal positions in a high-inflation environment: the case of Croatia

Frane Banić, Dominik Ivan Pripuzic () and Pave Rebic ()
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Dominik Ivan Pripuzic: Croatian National Bank, Zagreb, Croatia
Pave Rebic: Croatian National Bank, Zagreb, Croatia

Public Sector Economics, 2023, vol. 47, issue 4, 461-475

Abstract: This paper analyses the short- and medium-term effects of high inflation on fiscal developments in Croatia. The main analytical novelty is to add inflation shocks to the fiscal reaction function, an approach that was not considered in macro-fiscal research during the long period of moderate inflation. Our results suggest that inflation has a favourable effect on the primary balance in the short term, which can be explained by the positive effect of inflation on nominal tax revenues and an initial lagged adjustment of public expenditure to inflation. In the medium term, however, inflation is likely to have a negative effect on the primary balance by raising government expenditure more than tax revenues.

Keywords: fiscal policy; inflation; tax revenue; public expenditure; debt dynamics; business cycle; breakpoint regression (search for similar items in EconPapers)
JEL-codes: C14 C32 E32 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:ipf:psejou:v:47:y:2023:i:4:p:461-475

DOI: 10.3326/pse.47.4.4

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