Template-Type: ReDIF-Paper 1.0
Author-Name: Ryan Niladri Banerjee
Author-X-Name-First: Ryan Niladri
Author-X-Name-Last: Banerjee
Author-Name: Valerie Boctor
Author-X-Name-First: Valerie
Author-X-Name-Last: Boctor
Author-Name: Aaron Mehrotra
Author-X-Name-First: Aaron
Author-X-Name-Last: Mehrotra
Author-Name: Fabrizio Zampolli
Author-X-Name-First: Fabrizio
Author-X-Name-Last: Zampolli
Title: Fiscal deficits and inflation risks: the role of fiscal and monetary policy regimes
Abstract: Using data from a panel of advanced economies over four decades, we show that the inflationary effect of fiscal deficits crucially depends on the prevailing fiscal-monetary policy regime. Under fiscal dominance, defined as a regime in which the government does not adjust the primary balance to stabilise debt and the central bank is less independent or puts less emphasis on price stability, the average effect on inflation of higher deficits is found to be up to five times larger than under monetary dominance. Under fiscal dominance, higher deficits also increase the dispersion of possible future inflationary outcomes, especially the probability of high inflation. Based on forecasts from our model, the high inflation experienced by many countries during the recovery from the Covid-19 pandemic appears more consistent with a regime of fiscal dominance than monetary dominance.
Length: 37 pages
Creation-Date: 2022-07
File-URL: https://www.bis.org/publ/work1028.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1028.htm
File-Format: text/html
Number: 1028
Keywords: fiscal deficit, inflation, fiscal policy regime, monetary policy regime, monetary policy independence
Classification-JEL: E31, E52, E62, E63
Handle: RePEc:bis:biswps:1028