On the Low-Frequency Relationship Between Public Deficits and Inflation

Martin Kliem · Alexander Kriwoluzky · Samad Sarferaz

28 citations0/0 files storedJournal of Applied Econometrics

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Monetary Policy and Economic Impact Fiscal Policies and Political Economy Market Dynamics and Volatility

Abstract

We estimate the low-frequency relationship between fiscal deficits and inflation and pay special attention to its potential time variation by estimating a time-varying vector autoregression model for US data from 1900 to 2011. We find the strongest relationship neither in times of crisis nor in times of high public deficits, but from the mid 1960s up to 1980. Employing a structural decomposition of the low-frequency relationship and further narrative evidence, we interpret our results such that the low-frequency relationship between fiscal deficits and inflation is strongly related to the conduct of monetary policy and its interaction with fiscal policy after World War II.Copyright © 2015 John Wiley & Sons, Ltd.

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References

1993A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems 2000Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory*2005Time Varying Structural Vector Autoregressions and Monetary Policy 2002An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output 1998Monetary policy rules in practice 2010The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks 1991Equilibria under ‘active’ and ‘passive’ monetary and fiscal policies 2005Drifts and volatilities: monetary policies and outcomes in the post WWII US

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