Inflation and Federal Budget Deficits: some Empirical Results

Abstract

This article examines empirically the potential link between federal budget Abstract deficits and inflation in the post-1960 period. Based on established economic theory, and contrary to most previous empirical studies, the article estimates a model in which monetary and other financial assets (government bonds) are treated equally. The empirical results suggest that both monetary growth and federal deficits exert a significant influence on inflation during the 1960s and 1970s. The results further indicate that, relative to monetary growth, federal deficits have had a stronger and more reliable impact on inflation. Thus, along with restraints in monetary expansions, restrictive fiscal policy is also found to be an important anti-inflationary measure.