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Fiscal Deficits and Inflation: A New Look at the Emerging Market Evidence

Luis Catão () and Marco Terrones ()

No 2001/074, IMF Working Papers from International Monetary Fund

Abstract: Empirical studies have had little success in finding a statistically significant relationship between fiscal deficits and inflation in broad cross-country panels. This paper provides new econometric estimates for a panel of 23 emerging market countries during 1970-2000. Unlike previous studies, we allow for a rich dynamic specification and focus on the long-run relationship between the two variables controlling for differences in the inflation tax base. We find that a 1 percentage point reduction in the ratio of fiscal deficit to GDP typically lowers long-run inflation by 1½ to 6 percentage points, depending on the size of the inflation tax base.

Keywords: WP; exchange rate; fiscal deficit; world inflation; Fiscal Policy; Inflation; Emerging Markets; deficit measure; narrow money; deficit-inflation relationship; deficit variable; oil price; deficit concept; PMGE estimate; Government debt management; Oil prices; Exchange rate arrangements; Interest payments; Global (search for similar items in EconPapers)
Pages: 31
Date: 2001-05-01
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