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Fiscal dominance and inflation: evidence from Sub-Saharan Africa

Author

Listed:
  • John Hooley

    (International Monetary Fund, Fiscal Affairs Department, Washington, D.C., United States)

  • Lam Nguyen

    (Citigroup, Enterprise Scenario Group, Irving, Texas, United States)

  • Mika Saito

    (International Monetary Fund, African Department, Washington, D.C., United States)

Abstract

During the Covid-19 pandemic, the debate on monetary financing was reignited and several economists called for governments to borrow from their central banks to finance larger deficits. Sub-Saharan Africa provides useful insights into this debate since it is a region where “fiscal dominance†has long been widespread. We find that fiscal dominance is stronger during periods of pressure on public finances, particularly when alternative financing options are limited. We also find that central bank financing of government does have an inflationary impact through the exchange rate channel. Numerical legal limits on central bank financing can be an effective way to mitigate the risks, even if they are not always binding.

Suggested Citation

  • John Hooley & Lam Nguyen & Mika Saito, 2024. "Fiscal dominance and inflation: evidence from Sub-Saharan Africa," Public Sector Economics, Institute of Public Finance, vol. 48(3), pages 363-391.
    • Handle: RePEc:ipf:psejou:v:48:y:2024:i:3:p:363-391
    DOI: 10.3326/pse.48.3.5
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    More about this item

    Keywords

    inflation; monetary policy; central bank; fiscal policy; fiscal dominance; quasi-fiscal; policy coordination; exchange rate;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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