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Inflation and government budget constraint in Korea

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  • Byung Han Seo

Abstract

The new classical theory of inflation implies that the choice between financing a given path of public spending through debt or tax (seigniorage) finance has no substantial effect on inflation. This paper tests this hypothesis for Korea by estimating a reduced-form relation between inflation, the monetary base, and central bank debt. The empirical evidence suggests that central bank debt carrying information on the expected future path of monetary policy has additional explanatory power for inflation, even after accounting for the effects of the monetary base. It also confirms the hypothesis that the rate of inflation is not significantly affected by the time path of central bank debt in the long run.

Suggested Citation

  • Byung Han Seo, 1996. "Inflation and government budget constraint in Korea," Pacific Basin Working Paper Series 96-03, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfpb:96-03
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