The Effects of Inflation on Public Finances

Daniel Garcia-Macia

No 2023/093, IMF Working Papers from International Monetary Fund

Abstract: Does inflation help improve public finances? This paper documents the dynamic responses of fiscal variables to an inflation shock, using both quarterly and annual panel data for a broad set of economies. Inflation shocks are estimated to improve fiscal balances temporarily, as nominal revenues track inflation closely, while nominal primary expenditures take longer to catch up. Inflation spikes also lead to a persistent reduction in debt to GDP ratios, both due to the primary balance improvement and the nominal GDP denominator channel. However, debt only falls with inflation surprises—rises in inflation expectations do not improve debt dynamics, suggesting limits to debt debasement strategies. The results are robust to using various inflation measures and instrumental variables.

Keywords: Inflation; fiscal balance; public debt; inflation shock; inflation expectation; inflation surprise; inflation measure; inflation outlier; Fiscal stance; Deflation; Commodity prices; Exchange rate arrangements; Global (search for similar items in EconPapers)
Pages: 24
Date: 2023-05-05
New Economics Papers: this item is included in nep-mon
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