Fiscal Policy Dynamics and Inflationary Effects
Summary
Fiscal policy dynamics encompass government decisions on taxation, public expenditure and borrowing, and their influence on aggregate demand, output and price levels. When governments run deficits—spending in excess of revenues—they may finance the gap through borrowing or money creation, each route carrying distinct inflationary implications. Borrowing from financial markets can crowd out private investment and raise interest rates, while financing via central banks tends to expand the broad money supply and fuel demand-driven price rises. The transmission of fiscal impulses to inflation is also shaped by financial sector depth, regulatory frameworks and exchange-rate movements. Empirical research has moved beyond simple deficit-inflation correlations to explore nonlinearities, state-dependent effects and interactions with monetary policy. In advanced and emerging economies alike, the balance between fiscal consolidation and counter-cyclical support remains central to maintaining price stability without undermining growth. Practical applications range from calibrating stimulus packages during downturns to designing medium-term fiscal frameworks that anchor inflation expectations. The global significance of these dynamics is underscored by spill-over effects across open economies and the need for policy coordination in an interconnected financial environment.
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Fiscal Policy Dynamics and Inflationary Effects publication trend
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Technical terms
Fiscal deficit: The gap between government expenditure and revenue over a fiscal period.
Money supply: The total stock of monetary assets in an economy, including cash and bank deposits.
Inflation: A sustained rise in the general level of prices of goods and services.
Broad money (M2): A measure of money supply encompassing currency in circulation, demand deposits and near-money assets.
ARDL model: Auto-Regressive Distributed Lag model, a statistical method for estimating short- and long-run relationships among integrated variables.
References
- The inflationary effect of the budget deficit: does financial sector development matter?. Journal of Innovation and Entrepreneurship (2024).
- Money supply, inflation and economic growth of Sri Lanka: co-integration and causality analysis. Journal of Money and Business (2023).
- The Impact of Public Expenditure on Inflation: An ARDL Approach. Financial Markets Institutions and Risks (2024).
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