Budget deficits, money growth and inflation: empirical evidence from Vietnam

Hoang Van Khieu

doi:10.1108/frep-05-2021-0030

Abstract

PurposeThis paper aims to uncover the nexus between budget deficits, money growth and inflation in Vietnam in the period 1995–2012.Design/methodology/approachThe paper uses a structural vector auto-regressive model of five endogenous variables including inflation, real GDP growth, budget deficit growth, money growth and the interest rate.FindingsIt is found that inflation rose in response to positive shocks to money growth and that budget deficits had no significant impact on money growth and therefore inflation. This empirical evidence supports the hypothesis that fiscal and monetary policies were relatively independent. Money growth significantly decreased in response to a positive shock to inflation; interest rates had no significant effect on inflation but considerably increased in response to positive inflation shocks. This implies that the monetary base was more effective than interest rates in fighting inflation.Originality/valueThis paper sheds light into understanding the link between budget deficits, money growth and inflation in Vietnam during the high-inflation period 1995–2012. The finding supports the hypothesis that fiscal and monetary policies were relatively independent over the period.

Highlights

Price stability is the primary goal of the monetary policies of almost all central banks in the world
This paper aims at understanding the nexus between budget deficits, the money supply and inflation in the high-inflation and large-budget-deficit period 1995–2012 in Vietnam
Concluding remarks This paper uncovers the nexus between budget deficits, money growth and inflation in Vietnam in the period 1995–2012 using a structural vector auto-regressive (SVAR) model

Summary

Introduction

Price stability is the primary goal of the monetary policies of almost all central banks in the world. Understanding the determinants of inflation is very important and has received enormous interest from researchers and policymakers. By definition, is a rapid and continuing rise in the price level and is caused by a high growth rate of the money supply. A budget deficit can be a source of inflation, but it depends on how long the deficit lasts, and how it is financed. A temporary budget deficit can lead to only a temporary increase in the price level no matter how the deficit is funded. If budget deficits are permanent and financed by money creation, inflation occurs. The central bank and commercial banks purchase government bonds, leading to an increasing

Objectives

Findings

Conclusion