Fiscal dominance and inflation: evidence from Sub-Saharan Africa

John Hooley (), Lam Nguyen () and Mika Saito
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John Hooley: International Monetary Fund, Fiscal Affairs Department, Washington, D.C., United States
Lam Nguyen: Citigroup, Enterprise Scenario Group, Irving, Texas, United States

Public Sector Economics, 2024, vol. 48, issue 3, 363-391

Abstract: During the Covid-19 pandemic, the debate on monetary financing was reignited and several economists called for governments to borrow from their central banks to finance larger deficits. Sub-Saharan Africa provides useful insights into this debate since it is a region where “fiscal dominance†has long been widespread. We find that fiscal dominance is stronger during periods of pressure on public finances, particularly when alternative financing options are limited. We also find that central bank financing of government does have an inflationary impact through the exchange rate channel. Numerical legal limits on central bank financing can be an effective way to mitigate the risks, even if they are not always binding.

Keywords: inflation; monetary policy; central bank; fiscal policy; fiscal dominance; quasi-fiscal; policy coordination; exchange rate (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E61 E62 F31 H62 H63 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:ipf:psejou:v:48:y:2024:i:3:p:363-391

DOI: 10.3326/pse.48.3.5

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