Fiscal Deficits and Inflation: A New Look at the Emerging Market Evidence, Issues 2001-2074
International Monetary Fund, Research Department, May 1, 2001 - Business & Economics - 31 pages
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.
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cointegrated Czech Republic deficit to GDP deficits and inflation econometric Effects Estimate Hausman Effects Estimate Individual emerging markets Error correction coefficient Estimate Hausman Test Estimate Individual Hausman Estimates of Inflation Estimator Effects Estimate Estimator Estimator Effects Estimator Mean Group exchange rate regimes explanatory variables fiscal balance fiscal deficit measured fiscal dominance Fixed Effects Estimate Fixed Exchange Rate Fixed Individual Estimator Government Deficit Group Estimator Static Group Static Fixed Hausman Test Government hyperinflation Individual Estimator Estimator Individual Hausman Test inflation rate inflation tax base interest payments International Financial Statistics Joint Hausman Statistic lags long-run relationship lower inflation Mean Group Estimator Mean Group Static Mean Mean Group MG estimator narrow money nominal deficit nominal interest rate percent percentage point reduction Pesaran PMGE Pooled Mean Mean ratio of fiscal ratio of narrow regressions relationship between fiscal robustness Sahay seignorage Static Fixed Effects Static Fixed Individual statistically significant Vegh World Inflation yields Zimbabwe