Is Inflation Fiscally Determined?

Abstract

This paper examines the relationship between fiscal policy and inflation for 44 countries, from 1960 to 2020. The study was conducted using a panel VAR approach while accounting for the difference in monetary policy frameworks and the levels of fiscal space across countries. Results suggest that budget deficits are less likely to cause inflation when monetary policy is based on inflation targeting. In contrast, they are inflationary in the group of countries with a poorly structured monetary policy (such as partially dollarized Latin American economies).