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Fiscal Prerequisites for Inflation Targeting

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  • Zafar, Sabahat

Abstract

Inflation targeting has been gaining significant attention of policy makers during last thirty years, so far 38 countries have adopted inflation targeting regime to conduct their monetary policy operations. Successful implementation of this framework requires some prerequisites, the most important one is independence of central bank and non-observance of fiscal dominance. The paper analyzed whether inflation targeting regime is associated with lower fiscal deficit or debt levels, it has been identified that from the sample of 38 countries, 22 have reduced their deficit and 16 have lowered their debt level after adopting inflation targeting regime. The study also attempted to find the level of fiscal deficit that should be adhere by fiscal authorities before adopting inflation targeting regime. The system dynamic panel approach has been employed using panel data set of inflation targeted countries for the period ranged from 2000 till 2017. Based on the methodology developed by Catao and Terrones (2005), the study estimated the elasticity of inflation with respect to fiscal deficit to M1 ratio and used this elasticity to compute the level of fiscal deficit to M1 ratio for Pakistan’s economy.

Suggested Citation

  • Zafar, Sabahat, 2018. "Fiscal Prerequisites for Inflation Targeting," MPRA Paper 116254, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:116254
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    References listed on IDEAS

    as
    1. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
    2. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
    3. Mr. Mark Zelmer & Ms. Andrea Schaechter & Mr. Mark R. Stone & Ms. Alina Carare, 2002. "Establishing Initial Conditions in Support of Inflation Targeting," IMF Working Papers 2002/102, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Inflation targeting; Central Bank; Fiscal deficit;
    All these keywords.

    JEL classification:

    • 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
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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