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The Effects of Inflation on Public Finances

Author

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  • Mr. Daniel Garcia-Macia

Abstract

Does inflation help improve public finances? This paper documents the dynamic responses of fiscal variables to an inflation shock, using both quarterly and annual panel data for a broad set of economies. Inflation shocks are estimated to improve fiscal balances temporarily, as nominal revenues track inflation closely, while nominal primary expenditures take longer to catch up. Inflation spikes also lead to a persistent reduction in debt to GDP ratios, both due to the primary balance improvement and the nominal GDP denominator channel. However, debt only falls with inflation surprises—rises in inflation expectations do not improve debt dynamics, suggesting limits to debt debasement strategies. The results are robust to using various inflation measures and instrumental variables.

Suggested Citation

  • Mr. Daniel Garcia-Macia, 2023. "The Effects of Inflation on Public Finances," IMF Working Papers 2023/093, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/093
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=533099
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    Cited by:

    1. Vybhavi Balasundharam & Arika Kayastha & Mr. Marcos Poplawski Ribeiro, 2023. "Inflation Indexation in Public Finances: A Global Dataset on Current Practices," IMF Working Papers 2023/264, International Monetary Fund.

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