Revisit the Budget Deficits and Inflation: Evidence from Time and Frequency Domain Analyses

Aviral Kumar Tiwari,Süleyman Bolat,Özgür Koçbulut

doi:10.4236/tel.2015.53041

Aviral Kumar Tiwari, Süleyman Bolat + Show 1 more

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https://doi.org/10.4236/tel.2015.53041

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Abstract

The purpose of this paper is to test the relationship between budget deficits and inflation for nine EU countries during the period of 1990-2013 using the quarterly data. Recently, the public deficits and inflation have had an increasing importance for developing/emerging and developed countries to build the stability macroeconomic performance in the long run. This study is the first attempt to determine the relationship between the inflation and budget deficits for nine EU countries using different bootstrap causality tests. We employ the bootstrap causality and Granger causality test in the frequency domain analysis which allows us to distinguish short and long-run causality. We do not find a relationship between these variables when we employ bootstrap causality analysis. While the frequency domain causality shows that there is no relationship causality from budget deficits to inflation for all countries, causality from inflation to budget deficits indicates a permanent (long-run) relationship for Belgium, and France.

Highlights

There is a growing body of the literature which examines the relationships between the budget deficits and infla-How to cite this paper: Tiwari, A.K., Bolat, S. and Koçbulut, Ö. (2015) Revisit the Budget Deficits and Inflation: Evidence from Time and Frequency Domain Analyses
As a second method in this study, we use the Granger causality test in the frequency domain introduced by Breitung and Candelon [55]
This paper is the first attempt to determine the relationship between the inflation and budget deficits for nine EU countries using different bootstrap causality and frequency domain causality tests

Summary

Introduction

There is a growing body of the literature which examines the relationships between the budget deficits and infla-How to cite this paper: Tiwari, A.K., Bolat, S. and Koçbulut, Ö. (2015) Revisit the Budget Deficits and Inflation: Evidence from Time and Frequency Domain Analyses. Any deficits of public area can be financed bond sale to the public and seignorage combination proposed by monetary authority Under this condition, monetary authority can control the inflation, because they dominate the base money for current and future periods and choose to free. Due to gap between the revenue from demanded government and a number of bonds to public, governments run to monetize its deficits and monetary authority is forced to create additional money for government. They suggest that there is a correlation between the inflation and budget deficits. Fiscal dimension of inflation has been an increasing substantial in developing and emerging countries

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