Are fiscal deficits inflationary?

Abstract

This paper applies the dynamic panel quantile regression (DPQR) model under the autoregressive distributional lag (ARDL) speci cation, and examines the de citin ation relationship in 91 countries from 1960 to 2006. The DPQR model estimates the impact of de cits on in ation at various in ation levels and allows for a dynamic adjustment with the ARDL speci cation. The empirical results show that the scalde cit has a strong impact on in ation in high-in ation episodes, and has a weak impact in low-in ation episodes. The results imply that scal consolidation would be more e ective in price stabilization the higher the in ation rate is, and are consistent with the theoretical model of Cat~ao and Terrones (2005).