Abstract
This article's main goal is to evaluate the degree of fiscal dominance in Uruguay in 1999-2019 to improve the understanding of economic policy for theoretical reasons and applied needs related to good practices and accountability. Two strategies are followed: one, to quantify the fraction of fiscal expenditures that are financed by monetary liabilities and, the other one, to analyze the effects of fiscal deficit on the price level and inflation because inflationary financing may prevent the central bank from reaching its inflation target. Both situations may subordinate the monetary policy to the fiscal policy, signaling fiscal dominance. In addition, through the analysis performed to assess the degree of fiscal dominance, it is possible to detect the main determining factors of the Uruguayan price level (inflation) formation during the last two decades. So far, preliminary results suggest that inflation is not exclusively a monetary phenomenon and point to some inflationary financing with a mild degree of fiscal dominance.
Highlights
The interrelationship between monetary and fiscal policies is crucial in macroeconomic design
While the central bank firmly commits to price stability and independence, the fiscal policy must avoid deficit monetization or excess indebtedness that eventually could be financed by future money creation
It modifies (Catao & Terrones, 2005) 's autoregressive distributed lag (ARDL) model to a time series approach in a multi-cointegration framework that considers more than one longrun relation and diverse sources of consumer price changes. This procedure points to the main determining factors of the Uruguayan price level formation during the last two decades. It helps to decide whether the price level can be better explained by the traditional theory, by the fiscal theory of price determination (FTPL, based on the intertemporal government budget constraint and the fiscal policy), by a combination of both or many other sources
Summary
The interrelationship between monetary and fiscal policies is crucial in macroeconomic design. This procedure points to the main determining factors of the Uruguayan price level (inflation) formation during the last two decades It helps to decide whether the price level can be better explained by the traditional theory (based on the stock of money and the monetary policy), by the fiscal theory of price determination (FTPL, based on the intertemporal government budget constraint and the fiscal policy), by a combination of both or many other sources. Fiscal deficits influence inflation through money market conditions and real exchange rate equilibrium, while government dollarization exacerbates that pressure The outcome of this investigation suggests that inflation is not exclusively a monetary phenomenon in Uruguay and point to some inflationary financing with a mild degree of subordination of monetary policy to fiscal policy.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: International Journal of Finance & Banking Studies (2147-4486)
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
