The Impact of Budget Deficits on Inflation in Zambia

Abstract

Despite the vast amount of research and received literature on the impact of budget deficits on inflation, the last word has not been spoken on the theme.Is there a significant causal relationship between budget deficits and inflation?In many developing countries especially in sub-Saharan African countries this question has not been adequately investigated through rigorous research.And yet, in many of these countries where inflation has often proved to be an intractable issue, it is important for policy makers to know how risky it would be to finance public programmes through deficit spending beyond certain limits.This paper examines the role of budget deficits as a contributor to inflation in Zambia where hardly any previous work has been done in recent years in addressing this question.An econometric analysis has been done using the AutoRegressive Distributed Lag (ARDL) approach.The analysis shows that while there are significant short-run impacts of deficits on inflation, no significant long-run relationship exists.

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