Inflation and the Size of Government
44 Pages Posted: 30 Jan 2002
Date Written: November 2001
It is commonly supposed in public and academic discourse that inflation and big government are related. We show that economic theory delivers such a prediction only in special cases. As an empirical matter, inflation is significantly positively related to the size of government mainly when periods of war and peace are compared. We find a weak positive peacetime time series correlation between inflation and the size of government and a negative cross-country correlation of inflation with non-defense spending.
Keywords: Inflation, government size, central bank independence
JEL Classification: E5, H0, H6
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