What Are the Effects of Budget Balance Deficit Regimes on Inflation and Inflation Expectations?

Eliphas Ndou and Nombulelo Gumata
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Nombulelo Gumata: Eldoreigne X3

Chapter Chapter 13 in Fiscal Policy Shocks and Macroeconomic Growth in South Africa, 2023, pp 157-163 from Springer

Abstract: Abstract What are the effects of positive budget deficit shocks on inflation and inflation expectations? We find that inflation and inflation expectations across the spectrum increase in response to positive budget deficit shocks. Current inflation expectations increase more due to positive budget deficit shocks. Using the −3 per cent budget deficit as a ratio of nominal GDP to demarcate high and low budget deficit regimes, we establish that budget deficit regimes exert different effects on inflation and inflation expectations. Evidence shows that inflation and inflation expectations across the spectrum increase due to positive budget deficit shocks in the high budget deficit regime. This is compared to an insignificant and muted increase in the low budget deficit regime. In addition, evidence shows that persistent positive budget deficit shock effects result in higher inflation and inflation expectations compared to non-persistent shocks. Thus, budget deficit regimes and their persistence matter for the price stability mandate.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-37755-6_13

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DOI: 10.1007/978-3-031-37755-6_13

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