What is the Relationship between Large Deficits and Inflation in Industrialized Countries?

Abstract

Examining industrialized countries, the authors find that large deficits are not associated with higher inflation contemporaneously, nor are they associated with the emergence of higher inflation in subsequent years. This finding suggests that countries that can afford large deficits have built solid reputations and institutions supporting a sound monetary policy and the reversion to a stable fiscal regime.

Keywords: public deficit, inflation, time inconsistency, government debt, central bank independence, Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Deficit, Surplus, Debt, Debt Management,

JEL Classification: H62, H63