Fiscal Policy and Inflation Volatility

40 Pages Posted: 19 May 2004

Date Written: March 2004

Abstract

Among the harmful effects of inflation, the negative consequences of inflation volatility are of particular concern. These include higher risk premia, hedging costs and unforeseen redistribution of wealth. This paper presents panel estimations for a sample of OECD countries which suggest that activist fiscal policies may have an important impact on CPI inflation volatility. Major results are robust for unconditional and conditional inflation volatility, the latter derived from country-specific GARCH models, and across different data frequencies, time periods and econometric methodologies.

From a policy perspective, these results point to the possibility of further destabilising effects of discretionary fiscal policies, in addition to their potential to destabilise output.

Keywords: inflation volatility, fiscal policy

JEL Classification: E31, E62

Suggested Citation

Rother, Philipp, Fiscal Policy and Inflation Volatility (March 2004). Available at SSRN: https://ssrn.com/abstract=515081 or http://dx.doi.org/10.2139/ssrn.515081

Philipp Rother (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 0 (Phone)
+49 16 1344 6398 (Fax)

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