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

32 Pages Posted: 15 Feb 2006  

Luis Catão

International Monetary Fund (IMF)

Marco E. Terrones

International Monetary Fund (IMF)

Date Written: May 2001

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: Fiscal Policy Inflation Emerging Markets

JEL Classification: E31 E60

Suggested Citation

Catão, Luis and Terrones, Marco E., Fiscal Deficits and Inflation A New Look at the Emerging Market Evidence (May 2001). IMF Working Paper, Vol. , pp. 1-32, 2001. Available at SSRN: https://ssrn.com/abstract=879583

Luis Catão (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Marco E. Terrones

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4329 (Phone)

HOME PAGE: http://imf.org/external/np/CV/AuthorCV.aspx?AuthID=171

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