Are money growth and inflation related to government deficits? evidence from ten industrialized economies

Abstract

We present empirical evidence on the relation between the government debt growth, money growth and inflation for ten industrialized countries over the post World War II period. Non-parametric and parametric tests reveal little evidence that government debt growth is either related to money growth or permanently related to inflation over periods of a decade or less. But the level of debt is significantly associated with subsequent inflation from 1974 to 1983. These results are consistent with the hypothesis that central banks in developed economies can conduct independent monetary policy over long periods, notwithstanding government deficits.