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Public Sector Wage Cycles and the Co-movement of the Fiscal Deficit and Inflation in Less-Developed Countries

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  • Buffie, Edward F

Abstract

In this paper I analyze the co-variation of the fiscal deficit and inflation in a simple perfect foresight model that incorporates low- and high-wage cycles of equal depth and duration. When money and consumption are not extremely strong complements and the wage-cycle not extremely short-lived, inflation rises above its pre-stabilization level while the deficit is lower. The results thus argue that public sector wage cycles may underlie the weak empirical correlation of the deficit and inflation.

Suggested Citation

  • Buffie, Edward F, 1999. "Public Sector Wage Cycles and the Co-movement of the Fiscal Deficit and Inflation in Less-Developed Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 785-810, November.
    • Handle: RePEc:mcb:jmoncb:v:31:y:1999:i:4:p:785-810
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    Cited by:

    1. Raghbendra Jha, 2001. "Macroeconomics of Fiscal Policy in Developing Countries," WIDER Working Paper Series DP2001-71, World Institute for Development Economic Research (UNU-WIDER).
    2. Raghbendra Jha, 2004. "Macroeconomic stabilization and pro-poor budgetary policy in the globalized economy," CAMA Working Papers 2004-08, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Hemantha K.J. Ekanayake, 2012. "The Link Between Fiscal Deficit and Inflation: Do public sector wages matter?," ASARC Working Papers 2012-14, The Australian National University, Australia South Asia Research Centre.
    4. Mehrara , Mohsen & Behzadi Soufiani , Mohsen, 2015. "The Threshold Impact of Fiscal and Monetary Policies on Inflation: Threshold Model Approach," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 10(4), pages 1-27, October.

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