Keynes popularized deficit financing as an effective fiscal instrument to control the economic fluctuations and to raise the level of the employment and output. Nov 19, 2015 this also means that a high fiscal deficit runs the risk of government cornering the bulk of the savings, leaving little for corporate and other borrowers crowding out. Unlike previous studies, we model inflation as nonlinearly related to fiscal deficits through the inflation tax. Monetarist argue that inflation is a monetary phenomenon while the structuralist school stress focus on structural factors prevalent in a less developed country to explain inflationary processes ashra et al, 2004. Annual time series data spanning 42 years on inflation, fiscal deficits, agriculture, money supply and gross domestic product were sourced from central bank. In addition, we use the fiscal deficit scaled by gdp to test the robustness of the empirical results. The impact of fiscal deficits on inflation in nigeria between. An empirical assessment of fiscal deficit and inflation relationship. The net fiscal deficit is the gross fiscal deficit less net lending of the central government.
Fiscal deficit revenues expenditure suppose if you are earning 100 rs and spending 120, the deficit is 20. This paper reexamines the issue in light of broader data and a new modeling approach that incorporates two key features of the theory. Therefore, in contrast with previous studies on the fiscal deficit inflationnexus, our. What is the relation between fiscal deficit and inflation in. Fiscal deficit is said to be one of the important variables to have an influence on output growth. Jan 27, 2020 the second type of fiscal policy is contractionary fiscal policy, which is rarely used. Fiscal deficits, output growth and inflation targets in ghana. Longterm deficits, however, can be detrimental for. The hypothesis is that an unsustainable fiscal policy would make government miss some. How fiscal deficit affect economic growth does is a hotly debated issue. This paper examines the deficitinflation nexus in the zimbabwean economy and establishes the causal link that runs from the budget deficit to the inflation rate using johansen 1991, 1995 cointegration technique over the period 1980 2005. Deficit spending does not always lead to inflation depending on how the funds are sourced for. Their analysis, in which the fiscal deficit is scaled by narrow money to introduce a nonlinearity to the model, finds that there is a strong link between fiscal deficits and inflation even in moderately high inflation countries. An empirical analysis of fiscal deficits and inflation in nigeria.
Yet empirical research has had limited success in uncovering this relationship. This scenario suggests a procyclical money supply with tendency to outgrow the inflation rate. This study examined fiscal deficits and inflation in nigeria for the period of 30 years starting from 1980 to 2010. Now the major research question has been on the conditions that improve the effectiveness of fiscal policy intervention on economic growth and recent years have seen a revival of the debate about the role of fiscal policy in stimulating economic activity. Although the direction of the causation is generally accepted from deficits to inflation empirical evidence on this unidirectional causation is inconclusive abizadeh and yousefi, 1986. A fiscal deficit is a shortfall in a governments income compared with its spending. An increase in the fiscal deficit, in theory, can boost a sluggish economy by giving more money to people who can then buy and invest more. Gdp, the operational deficit in egypt is still bigger than the simple cash deficit in high inflation argentina t with exception of 1989, a year of an abnormal jump in the central bank of argentinas quasi fiscal deficit. Abstract this study has made an attempt to examine the direction of causality among the fiscal deficit, government expenditure, money supply, and inflation. Pdf on jan 1, 2011, aviral kumar tiwari and others published fiscal deficit and inflation. Apr 12, 2016 i will try to answer this question with the knowledge i have. Macroeconomic theory postulates that fiscal deficits cause inflation.
The second method outlined answers your question as to why deficit spending can be inflationary. Dynamic panel estimates of inflation on general government deficit over mi. A positive corelation between the fiscal deficit to gdp ratio and inflation in sri lanka can be seen in figure 1. This study examines the linkage between fiscal deficit and inflation in india. The impact of budget deficits on inflation in zambia. Deficit financing, the debt, and modern monetary theory congressional research service 1 introduction traditional macroeconomic theory addresses two main questions. One of the most important aspects of fiscal policy is the management of the public sectors fiscal deficit. Fiscal deficits and inflation request pdf researchgate. Jul 14, 2003 with or without oil price inflation, fiscal deficits continue to display a powerful effect on inflation in developing countries, emerging markets, and high inflation and a much smaller effect. An empirical analysis for india aviral kumar tiwari 1 a. The tools of contractionary fiscal policy are used in reverse.
To empirically determine the effects of fiscal deficit on investment decision in nigeria. Fiscal deficits, exchange rate crises and inflation. Theoretically, fiscal deficit may be inflationary, but its sources of financing can bring change in significance and impact. Deficit financing, the debt, and modern monetary theory. The longterm impact of inflation can damage the standard of living as much as a recession. A fiscal deficit occurs when a governments total expenditures exceed the revenue that it generates, excluding money from borrowings. To critically analyze the causality linkage between fiscal deficit and inflation in nigeria.
Understanding the effects of fiscal deficits on an economy. In the light of unsettled debate pertaining to the inflationary tendencies of fiscal deficit, the present study attempts to empirically examine the important macroeconomic determinants of inflation in india and investigates whether the proposition of a positive effect of fiscal deficits on inflation can be verified in the particular case of the. Its goal is to slow economic growth and stamp out inflation. The growth and persistence of fiscal deficit is not countryspecific. Deficit financing, the debt, and modern monetary theory congressional research service 2 explaining mainstream economic views although basic macroeconomic models vary in many ways, any macroeconomic model that allows for fiscal and monetary policy to influence the economy has three relationships in the. The empirical relationship between fiscal deficits and inflation. Tiwari 2 this study examines the linkage between fiscal deficit and inflation in india. What is the relation between fiscal deficit and inflation. Fiscal deficits and inflation international monetary fund. The main objective of this study is to examine the factors that are responsible for increasing fiscal deficit in india, by taking into account all factors that can affect. Mar 28, 2020 an increase in the fiscal deficit, in theory, can boost a sluggish economy by giving more money to people who can then buy and invest more. The fiscal theory of price level suggests that persistent budget. Find, read and cite all the research you need on researchgate.
Gdp, the operational deficit in egypt is still bigger than the simple cash deficit in highinflation argentina t with exception of 1989, a year of an abnormal jump in the central bank of argentinas quasifiscal deficit. Find out the nature of relationship between fiscal deficits and macroeconomic aggregates in nigeria. First, macroeconomic theory and policy seek to mitigate shortterm economic fluctuations or stabilize the economy that leave productive resources idle for a time. The aim was to establish which among inflation rate and interest rate impact on fiscal deficit. There is no significant relationship between fiscal deficit and inflation, government taxes in nigeria h 0. Catao and terrones 2005 use annual data from 1960 to 2001 on an unbalanced panel of 107. Capital expenditure is incurred to create longterm assets such as factories, buildings and other development. It goes beyond existing studies on this subject by employing econometric technique, particularly, the ordinary. Thus, neither aggregate demand nor monetary expansion associated with larger fiscal deficits posed any immediate concern on the inflation front.
The main objective of this study is to examine the factors that are responsible for increasing fiscal deficit in india, by taking into account all factors that can affect the status of fiscal deficit. Examine whether fiscal deficit leads to economic growth in nigeria. In india where in the last some years since 1996, a good deal of industrial capacity has been lying idle due to lack of. They found that 1 percentage point reduction in the ra tio. Pdf empirical investigation of fiscal deficits and. Such fiscal deficit simply refers to the excess of the public sectors spending over its revenue.
In the present study we have employed dolado and lutkepohl dl1996 and standard grangercausality. Fiscal deficit and its less inflationary sources of borrowing. What is the link, if any, between fiscal defict and inflation. I will try to answer this question with the knowledge i have. For instance, in the united states of america, the growth in federal deficit provided the impetus for a reassessment of the effects of fiscal deficit on economic activities. The main objective of this paper is to investigate the causal relationship between inflation and fiscal deficits in nigeria. Thus, unraveling the relationship between budget deficit and inflation has remained a source of both theoretical.
This study has made an attempt to examine the direction of causality among the fiscal deficit, government expenditure, money supply, and inflation. Among developing countries, a main obstacle to uncovering the fiscal deficit inflation relationship is inadequate modeling choice. Deficit financing is used as the simple and effective fiscal device to meet the financial requirements of the government during emergencies such as war. An empirical analysis of fiscal deficits and inflation in.
For example, during the 39year period 19702008, nigeria witnessed 33 years of fiscal deficits, with only 6 years of surplus fiscal operations central bank of nigeria, 2008. The empirical relationship between fiscal deficits and. A quantitative approach to consistent fiscal policy with an application to turkey. The study examined the relationship between inflation and fiscal deficits in nigeria. Request pdf fiscal deficits and inflation this paper calculates indices of central bank autonomy cba for 163 central banks as of end2003. A number of keynesian economists argue that fiscal deficit promotes growth. As in catao and terrones 2005, the fiscal deficit is measured by the nominal central government deficit scaled by narrow money. Prolonged periods of high fiscal deficit run the risk of raising interest rates and inflation and depressing growth. The impact of monetary financing of a fiscal deficit on the inflation rate was first formalised by sargent and. Developed economies show weak or no association between budget deficit and inflation. Generally fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure. Inflation is measured by the annual change in the consumer price index.
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