IMF-从未有过不同：财政政策冲击与通货膨胀 Its Never Different - Fiscal Policy Shocks and Inflation

It’sNeverDifferent:

FiscalPolicyShocks

andInflation

SerhanCevikandFedorMiryugin

WP/23/98

2023

MAY

2

WP/23/98

©2023InternationalMonetaryFund

IMFWorkingPaper

EuropeanDepartment

It’sNeverDifferent:FiscalPolicyShocksandInflation

PreparedbySerhanCevikandFedorMiryugin1

AuthorizedfordistributionbyBernardinAkitoby

May2023

IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement.

Abstract

Thispaperinvestigatestheimpactoffiscalshocksoninflation,usingalargepanelof139countriesovertheperiod1970–2021.First,bothheadlineandcoremeasuresofinflationincreaseinresponsetoexpansionaryshiftsinthefiscalpolicystance.Second,wesplitthesampleandobserveanintriguingpatternthatfiscalpolicyshocksareprimarilysignificantindevelopingcountries.Third,theinflationaryimpactoffiscalpolicyshocksisdependentonfiscalspaceandeconomicconditions,aswellasmonetarypolicytype,exchangerateregimesandfiscalrules,atthetimeoftheshock.Weconfirmtheseresultsbyusingthenarrativeapproachandforecasterrors,aswellascyclically-adjusteddataongovernmentrevenuesandnon-interestexpenditures,toidentifyexogenouschangesinfiscalpolicy.Theanalysishasseveralimportantpolicyimplications:(i)fiscalpolicyisacriticalanchorofmacroeconomicstability;(ii)fiscalpolicyshouldbeusedwithcareinaggregatedemandmanagementasithassignificanteffectsoninflation,whicharehighlydependentonfiscalspaceandeconomicconditions;and(iii)flexibleexchangeratesandrule-basedpolicymakingprovidegreaterresiliencetoinflationaryshocks.

JELClassificationNumbers:

E31;E50;E52;E62;E63;H60

Keywords:

Inflation;fiscalpolicy;publicdebt;outputgap;localprojections

Author’sE-MailAddress:

scevik@

;fmiryugin@

1TheauthorswouldliketothankBernardinAkitoby,CarlosGoncalves,AnnetaOrraca-Tetteh,AdrianPeralta,MarcosPoplawski-Ribeiro,FranciscoRoch,TatjanaSchulzeandtheparticipantsofaseminarattheEuropeanDepartmentoftheInternationalMonetaryFund(IMF)forhelpfulcommentsandsuggestions.

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“Historyrepeatsitself,thefirstastragedy,thenasfarce.”

―KarlMarx

I.INTRODUCTION

Theworldeconomyisinthemidstoftheworstinflationshocksincethe1970s,withglobalinflationsurgingover10percentin2022,fromanaverageof2.1percentduringtheperiod2010-2020.Thisisnotjustarecurringproblemindevelopingcountries,butitcouldalsobecomeanentrenchedphenomenoninadvancedeconomieswithalonghistoryoflowandstableinflation.Aconfluenceoffactors—rangingfromthestrongreboundinaggregatedemandcausedbyatitanicwaveoffiscalstimulusinthewakeoftheCOVID-19pandemictoglobalsupplyconstraintsandshockwavesthroughinternationalcommoditymarketstriggeredbyRussia’sinvasionofUkraine—hascontributedtothepost-pandemicsurgeinconsumerprices(Biniciandothers,2022).Nevertheless,asshowninFigure1,therearestillconsiderabledifferencesinthelevelofinflationandhowtheinflationprocesshaschangedacrosscountriesovertime.Inthispaper,weexamineinternationalevidenceontheroleoffiscalpolicyinshapinginflationdynamics,usingalargepanelof139countriesacrosstheworldovertheperiod1970-2021.

Weinvestigatethedynamicimpactoffiscalshocksoninflationbyapplyingthelocalprojection(LP)methoddevelopedbyJordà(2005)andestimateimpulseresponsefunctions(IRFs).WeidentifyfiscalpolicyshocksasadeteriorationofonestandarddeviationintheoverallorprimarybudgetbalanceasashareofGDPandexplorethepossibilityofstate-dependenteffectsoffiscalpolicyshocksonconsumerpriceinflationbylookingattwodimensions:(i)thepositionofagiveneconomyinthebusinesscycleatthetimethefiscalshockhits;and(ii)thepublicdebt-to-GDPratio(orinterestpaymentsasashareofGDP)asaproxyoffiscalspaceatthetimethefiscalshockoccurs.Forgreatergranularity,wealsoestimatethemodelsfordifferenttypesofmonetarypolicyframeworks(i.e.,inflationtargeting),exchangerateregimes(i.e.,fixedvs.floating),andthepresenceoffiscalrules.

Figure1.HeadlineandCoreInflationAcrosstheWorld

A)HeadlineInflation(%)B)CoreInflation(%)

Note:Eachboxcorrespondstothe25thand75thpercentileofobservationsinagivenyear,whilethewhiskersshowtheinterquartilerange.Thelineinsideaboxrepresentsthemedian;thereddotdenotestheaverage.Extremeoutlierscoloredinbluewithinflationbelow-30andabove50areremoved.

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Theempiricalanalysisshowsthatconsumerpriceinflationincreasesinresponsetofiscalpolicyshocks.Adeteriorationofonestandarddeviationintheoverallbudgetbalance-to-GDPratio,forexample,leadstoanincreaseof0.56percentagepointsinheadlineinflationinthefirstyearandby0.71percentagepointsonacumulativebasisoverthemediumterm.Theinflationaryimpactoffiscalpolicyshocksexhibitsasimilarmagnitudewhenweusetheprimarybudgetbalanceasameasureofthefiscalstancebutisestimatedtobemuchlargeroncoreinflation(excludingfoodandenergy).Thestrengthandpersistenceofinflationresponse,however,arenotuniformacrossdifferenttypesofcountriesandatdifferentstatesofeconomicactivityandfiscalspace.

•First,wesplitthesampleandobserveanintriguingpatternthatfiscalpolicyshocksareprimarilysignificantindevelopingcountriesthatincludeemergingmarketeconomiesandlow-incomecountries.Theimpactoffiscalshocksonheadlineinflationissignificantlygreaterindevelopingcountriesbuthasbroadlyequaleffectsoncoreinflationacrossallcountries.

•Second,weinvestigatethestate-dependenteffectsoffiscalshocksoninflationwithrespecttofiscalspaceandeconomicconditionsatthetimethefiscalshockoccursandfindthattheresponsetofiscalshocksdifferssignificantlyaccordingtotheleveloffiscalspaceandwhethertheeconomyisinrecessionornot.Inflationincreasesmoreduetoafiscalshockwhenacountryhasamoreconstrainedfiscalspaceasmeasuredbythepublicdebt-to-GDPratio(orinterestpaymentsasashareofGDP)andduringexpansionsineconomicactivity.

•Third,weobtainevidenceshowingthattheinflationaryeffectsoffiscalshocksvarywiththeexchangerateregime(fixedvs.floating),monetarypolicyframeworks(suchasinflationtargeting),andrule-basedfiscalpolicyframeworks.Countrieswithmoreflexibleexchangerateregimesandinflationtargetingtobetteranchormonetarypolicyorfollowingexplicitfiscalrulesappeartobemoreresilientagainstinflationpressurescausedbyfiscalshocks.

Weconfirmthebaselineresultsbyusingthenarrativeapproachandforecasterrors(thedifferencebetweenactualbudgetbalanceanditsforecast),aswellascyclically-adjusteddataongovernmentrevenuesandnon-interestexpenditures,toidentifyexogenouschangesinfiscalpolicyandobtainrobustevidenceontheinflationaryimpactofexpansionaryfiscalshocks.Allinall,theempiricalanalysispresentedinthispaperhaveseveralimportantpolicyimplications:(i)fiscalpolicyisacriticalanchorofmacroeconomicstability;(ii)fiscalpolicyshouldbeusedwithcareinaggregatedemandmanagementasithassignificanteffectsoninflation,whicharehighlydependentonfiscalspaceandeconomicconditions;and(iii)flexibleexchangeratesandrule-basedpolicymaking(inflationtargetingformonetarypolicyandfiscalrulesforfiscalpolicy)providegreaterresiliencetoinflationaryshocks.

Theremainderofthisstudyisorganizedasfollows.SectionIIprovidesanoverviewoftherelatedliterature.SectionIIIdescribesthedatausedintheanalysis.SectionIVintroducesthesalientfeaturesofoureconometricstrategyandpresentstheempiricalresults,includingaseriesofrobustnesschecks.Finally,SectionVoffersconcludingremarkswithpolicyimplications.

II.LITERATUREREVIEW

Theroleoffiscalpolicyinshapinginflationdynamicsisextensivelyaddressedintheliterature,notablystartingwiththe“unpleasantmonetaristarithmetic”putforwardbySargentandWallace(1981),whoarguethatfiscaldominance—resultingfrompersistentdeficitsandmountingpublic

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debt—exertspressureonthecentralbanktofollowinflationarymonetarypolicy.Consequently,continuingfiscaldeficits,especiallyintheabsenceofcrediblepolicycommitments,increaseinflationexpectationsandtherebyleadtohigherconsumerpriceinflation(Leeper,1991;Sims,1994;Woodford,1994,1995;Sims,2011;Cochrane,2019).Fischer,Sahay,andVegh(2002),focusingonapanelof133countriesbetween1960and1996,showthatthereisalinkbetweenfiscaldeficitsandinflationinhighinflationcases.Celasun,Gelos,andPrati(2004)andCataoandTerrones(2005)findapositivelinkbetweenfiscalimbalancesandinflation,especiallyinthecaseofdevelopingcountrieswithhighlevelsofinflation.Morerecently,usingapanelof21advancedeconomies,Banerjeeandothers(2022)showthattheinflationaryeffectoffiscaldeficitscruciallydependsontheprevailingfiscal-monetarypolicyregime.Thatis,underfiscaldominance,theaverageeffectoninflationofhigherdeficitsisuptofivetimeslargerthanundermonetarydominances.

Thispaperalsobuildsonabroaderliteratureoninflationdynamicsacrosscountriesandovertime.Theequilibriumrateofinflationisafunctionoffactorsdeterminingadegreeofinflationaversion,includingpolicypreferences(Rogoff,1985),macroeconomicdevelopmentsincludingthelevelofincomeandtradeopenness(Végh,1989;Romer,1993;CampilloandMiron,1997;Lane1997;GalíandGertler,1999;ClarkandMcCracken,2006;Badinger,2009),flexibilityoflabor-marketinstitutions(CukiermanandLippi,1999),typeofexchangerateregimes(Levy-YeyatiandSturzenegger,2001;Husain,Mody,andRogoff,2005),andpoliticalandinstitutionalfactors(Cukierman,1992;AisenandVeiga,2007).WhileMoore,Lewis-Bynoe,andMorgan(2012)identifydomesticdemandpressures,commoditypriceshocks,andpoliticalfactorsasthekeydeterminantsofinflationaryepisodes,otherstudies,buildingonKydlandandPrescott(1977)andBarroandGordon(1993),findarobustrelationshipbetweeninstitutionalfactorssuchascentralbankindependenceandinflation(Cukierman,Webb,andNeyapti,1992;AlesinaandSummers,1993;CampilloandMiron,1997;LouganiandSheets,1997;Cottarelli,Griffiths,andMoghadam,1998;Posen,1998;Neyapti,2003;Arnone,Laurens,andSegalotto,2006;Brumm,2006;Walsh,2008).

Anotherstrandoftheliteratureconnectsthemacroeconomicpolicytrilemmatoinflation,reasoningthatwhenacountrymaintainsapeggedexchangerateregime,itlosesitsmonetaryindependenceandthuseffectivecontrolofinflationdynamics.WhileHausmannandothers(1999)andFrankel,Schmukler,andServen(2004)arguethatexchangerateflexibilitydoesnotnecessarilyprovidemonetaryautonomy,Shambaugh(2004)findsevidencesuggestingthat“countrieswithfixedexchangeratesfollowtheinterestrateofthebasecountrymorecloselythancountrieswithflexibleexchangerates.”Inotherstudies,GrubenandMcLeod(2002),Gupta(2008),andBadinger(2009)examinetherelationshipbetweencapitalaccountopennessandinflationandfindthatunrestrictedcapitalmobilitylowersinflationbydiscipliningcentralbanks.Morerecently,CevikandZhu(2020)showthatacountry’sabilitytoconductitsownmonetarypolicyfordomesticpurposesindependentofexternalmonetaryinfluencesleadstolowerinflation.Thisisalsoconsistentwithempiricalfindingsthatindicatethattheadoptionofinflationtargetingasamonetarypolicyframeworkhasasignificantnegativeeffectoninflationindevelopingcountries(BritoandBystedt,2010;Samarina,Terpstra,andDeHaan,2014;ZhangandWang,2022).

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III.DATAOVERVIEW

Weconstructapaneldatasetofannualobservationscovering139countriesovertheperiod1970–2021.Thedependentvariableisinflation,whichiscomputedonanannualbasisastheyear-on-yearpercentagechangeintheconsumerpriceindex(CPI)asfollows:

CPIi,t

CPIi,t−1

i,t=()*100

wherei,tdenotesinflationincountryiattimetbasedonheadlineandcoreCPIseries,drawnfromtheWorldBank’sglobaldatabaseofinflation.2WeremoveextremeoutlierssuchastherecenthyperinflationepisodeinZimbabweorthetransitionperiodintheformerSovietrepublics).AppendixTableA1providesthesummarystatisticsofallvariablesusedintheestimations.

ThemainexplanatoryvariableofinterestisthefiscalpolicystanceasmeasuredbytheoverallorprimarybudgetbalanceasashareofGDP,whichshowconsiderablevariationacrosscountriesandovertime(Figure2).WeobtainthefiscaldatafromtheIMF’sGovernmentFinanceStatistics(GFS)database.WemeasurefiscalpolicyshocksasadeteriorationofonestandarddeviationintheoverallorprimarybudgetbalanceasashareofGDP.Asarobustnesscheck,weidentifyexogenouschangesinfiscalpolicywithseveralalternativeapproaches.First,weusethenarrativeapproach,whichcoversonlyforasubsetof17advancedeconomiesovertheperiod1980–2011and14emergingmarketeconomiesovertheperiod1991–2017(Devriesandothers,2011;DavidandLeigh,2018).Second,wefollowAuerbachandGorodnichenko(2013)anduseforecasterrors—thedifferencebetweenactualbudgetbalanceanditsforecast—in35advancedand50emergingmarketeconomiesoverashorterperiod(2003–2021).Weconstructthese“fiscalpolicy”forecast

Figure2.FiscalPolicyStanceAcrosstheWorld

A)OverallBalancetoGDP(%)B)PrimaryBalancetoGDP(%)

Note:Eachboxcorrespondstothe25thand75thpercentileofobservationsinagivenyear,whilethewhiskersshowtheinterquartilerange.Thelineinsideaboxrepresentsthemedian;thereddotdenotestheaverage.ExtremeoutlierscoloredinbluewithCPIbelow-20andabove20areremoved.

2Thisdatasetisavailableat

/en/research/brief/inflation-database

.Ha,Kose,andOhnsorge(2021)providedetailedinformationonthedatabase.

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errorsasthedifferencesbetweentheone-year-aheadforecastsintheautumneditionoftheIMF’sWEOreportandtheactualoverallandprimarybudgetbalancesreportedinthefollowingyear:

fei,t=bpt−bpt

inwhichfei,tdenotesthedifferencebetweenactualbudgetbalanceasashareofGDP(bpt)anditsone-year-aheadforecast(bpt)incountryiattimet.Thisidentificationapproachhelpsdealwith

thepotentialfeedbackfromthestateoftheeconomytofiscalpolicyshocks.Third,insteadoffocusingontheoverallfiscalstance,weusecyclicallyadjustedgovernmentrevenuesandexpenditurestoprovideamoregranularassessmentofhowdifferentfiscalpolicytoolsaffectinflation.

Wearealsointerestedinthepossibilityofstate-dependentnonlineareffectsoffiscalpolicyonconsumerpriceinflationbylookingattwodimensions:(i)thestateoftheeconomyatthetimethefiscalshockhits;and(ii)thelevelofpublicdebtasaproxyoffiscalspaceanditsinteractionwiththefiscalpolicystanceduringshocks.Followingtheliteratureonthedeterminantsofinflation,weincludeasetofcontrolvariables,suchasrealGDPpercapita,realGDPgrowth,internationaltradeasashareofGDP,credittotheprivatesectorasashareofGDP,moneysupplygrowth,centralbankindependenceasmeasuredbytheextendedcentralbankindependence(CBIE)indexconstructedbyRomelli(2022).Toobtaingranularestimations,weseparatecountriesintothefollowinggroups:(i)inflation-targeting,(ii)fixedandflexibleexchangerateregimesbasedonthedefactoexchangeratearrangementclassificationofIlzetzki,Reinhart,andRogoff(2019),andiii)withandwithoutfiscalrules.

Itisessentialtoanalyzethetime-seriespropertiesofthedatatoavoidspuriousresultsbyconductingpanelunitroottests.WecheckthestationarityofallvariablesbyapplyingtheIm-Pesaran-Shin(2003)procedure,whichiswidelyusedintheempiricalliteraturetoconductapanelunitroottest.Theseresults,displayedinAppendixTableA2,indicatethatthevariablesusedintheanalysisarestationaryafterlogarithmictransformationoruponfirstdifferencing.

IV.EMPIRICALSTRATEGY

Toestimatethedynamicimpactoffiscaldevelopmentsonconsumerpriceinflationovertheshortandmediumterm,weapplythesemi-parametricLPtechniqueandestimateasetofIRFsthatdirectlyplotasequenceoflinearprojectionsofheadlineandcoreinflationonthecurrentinformationsetincludingfiscalpolicyshocks.Accommodatingapanelstructure,thisframeworkdoesnotconstraintheshapeofIRFsandthereforeislesssensitivetomisspecificationcomparedtoconventionalvectorautoregressive(VAR)models(AuerbachandGorodnichenko,2013;JordàandTaylor,2016).Sinceitisespeciallyusefulinestimatingnonlineardynamicresponses,theLPframeworkiswidelyadoptedintherecentliteraturetoanalyzetheeffectsofmonetarypolicyshocks(Jeenas,2018)andfiscalpolicyshocks(RameyandZubairy,2018;RomerandRomer,2019).Accordingly,inthispaper,weinvestigatetheimpactoffiscalpolicyshocksonconsumerpriceinflationinapanelsettingbyestimatingthefollowingbaselineregression:

几i,t+h−几i,t−1=ai+Tt+Fhfsi,t+e′Xi,t+ei,t

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where几i,tdenotesinflationasmeasuredbyheadlineorcoreinflationincountryiattimet;fsi,tisameasureoffiscalpolicyshocksandFℎisthecumulativeresponseℎyearsafterafiscalpolicyshock;andXi,tisavectorofcontrolvariablesincluding3lagsoffiscalpolicyshocks,3lagsofthedependentvariable,and3lagsofrealGDPgrowth.Toensurerobustness,wealsoincluderealGDPpercapita,internationaltradeasashareofGDP,moneysupplygrowth,credittotheprivatesectorasashareofGDP,andtheCBIEindexasadditionalcontrolvariables.ThecoefficientsaiandTtdenotetime-invariantcountry-specificfeaturesandshocksthatarecommonacrossallcountriesinagivenperiod,respectively.ei,tisanidiosyncraticerrorterm.ThisequationisestimatedusingOrdinaryLeastSquares(OLS)withSpatialCorrelationConsistent(SCC)standarderrorsasproposedbyDriscollandKraay(1998)toaddresscross-sectionalandserialcorrelation.

Wefocusontheimpulseresponsesofinflationduetofiscalpolicyshocks—definedasadeteriorationofonestandarddeviationintheoverallorprimarybudgetbalanceasashareofGDP—andobtainIRFsbyplottingtheestimatedcoefficientFℎwith90percentand68percentconfidencebandscomputedusingtherespectivestandarderrors.Therefore,ourresultsshouldbeinterpretedastheimpactofafiscalpolicyshockonthedifferencebetweentheinflationrateℎyearsafterthefiscalshockandtheinflationratepriortotheshock.

Wealsoexplorewhetherinitialmacro-fiscalconditionsatthetimeofthefiscalpolicyshockinfluenceitsimpactoninflationbyallowingthedynamicresponsestovaryasfollows:

几i,t+ℎ−几i,t−1=ai+Tt+FF(zi,t)fsi,t+F[1−F(zi,t)]fsi,t+e′Xi,t+ei,twithF(zi,t)=,y>0

inwhichzi,tdenotesthestateoftheeconomyasmeasuredbytheoutputgapestimatedviatheHodrick-Prescott(HP)filter3andfiscalspaceasmeasuredbythepublicdebt-to-GDPratiothatisnormalizedtohavezeromeanandunitvariance.4ThecoefficientsFandFcapturetheimpactoffiscalpolicyshocksoninflationateachhorizonℎincaseofrecessions(F(zi,t)≈1whenzgoestominusinfinity)andexpansions([1−F(zi,t)]≈1whenzgoestoplusinfinity),respectively.Weestimatethestate-dependentmodelwithy=10.5Thisallowsustocapturestate-dependentnonlineareffectsoffiscalpolicyonconsumerpriceinflationaccordingtothecyclicalpositionoftheeconomyandavailablefiscalspacetocushionagainsttherecessionaryimpactoffiscalshocks.

3TheHPfilterproposedbyHodrickandPrescott(1997)separatestheGDPseriesintotrendandcyclicalcomponents,usingasmoothingparameterof6.25onannualdata.

4Theweightsassignedtoeachregimevarybetween0and1accordingtotheweightingfunctionF(.),sothatF(zi,t)canbeinterpretedastheprobabilityofbeinginagiveneconomicstate—boomorbust—ortheavailabilityoffiscalspace.Recentresearchutilizesawidevarietyofindicatorsoffiscalspace,includingthoseassociatedwiththedebtservicecapacityofsovereigns(Panizza,2008;JaimovichandPanizza,2010).Inthispaper,weusethepublicdebt-to-GDPandinterestpayments-to-GDPratios,whicharethemostwidelyavailablefiscal-spacevariableforabroadrangeofcountries.

5Theresultsforheadlineinflationremainbroadlyunchangedwithalternativevaluesoftheparametery,between0.1and10,aspresentedinAppendixTableA6-A9.Alternativeresultsforcoreinflationareavailableuponrequest.

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V.EMPIRICALRESULTS

Themainvariablesofinterestareheadlineandcoremeasuresofconsumerpriceinflation,andthereforewedirectlyestimatethepercentagechangeinthevariablesofinterestinresponsetoafiscalpolicyshockdefinedasadeteriorationofonestandarddeviationintheoverallandprimarybudgetbalancetoGDPratio.InFigure3,wepresenttheresultsofourbaselinespecificationincludingcontrolvariablesdescribedintheprevioussection.Eachchartshowstheimpactonheadlineinflationinoursampleovera4-yearperiodinresponsetoafiscalexpansionshock,where

Figure3.FiscalShocksandInflation:Baseline

A)

HeadlineInflation

OverallBalance

PrimaryBalance

B)

CoreInflation

OverallBalance

PrimaryBalance

Note:ThebluelinedepictstheresponseofinflationtoaonestandarddeviationfiscalshockcomputedbytheLPmethod.Standarderrorsarecorrectedforheteroskedasticity,spatialandserialcorrelationbytheDriscoll–Kraayprocedure.Theshadedareacorrespondstothe90percentconfidenceinterval;thedashedlinescorrespondtothe68percentconfidenceinterval.

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0indicatestheyearinwhichthefiscalshockoccurs.Theshadedareaindicatesthe90percentconfidenceintervalbasedonrobuststandarderrors,whilethedashedlinesdesignatethe68percentconfidenceinterval.

Wefindthatadeteriorationofonestandarddeviationintheoverallbudgetbalance-to-GDPratioleadstoapersistentincreaseinconsumerpriceinflation.Headlineinflationacceleratesbyabout0.56percentagepointsintheshortterm(afteroneyear),whichdissipatesoverthemediumterm(after4years).Theinflationaryimpactoffiscalpolicyshocksisofasimilarmagnitudewhenweusetheprimarybudgetbalance-to-GDPratioasameasureofthefiscalpolicystance,withanincreaseof0.49percentagepointsinheadlineinflationintheshorttermwithnopersistenteffectoverthemediumterm.Theshockhasasignificanteffectat90percentconfidenceleveloveroneperiodbut

Figure4.FiscalShocksandInflation:Advancedvs.Emerging

OverallBalance

PrimaryBalance

Headline

AE

EM&LIC

AE

EM&LIC

Core

AE

EM&LIC

AE

EM&LIC

Note:ThebluelinedepictstheresponseofinflationtoaonestandarddeviationfiscalshockcomputedbytheLPmethod.Standarderrorsarecorrectedforheteroskedasticity,spatialandserialcorrelationbytheDriscoll–Kraayprocedure.Theshadedareacorrespondstothe90percentconfidenceinterval;thedashedlinescorrespondtothe68percentconfidenceinterval.

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fadesawaystartingfromthenextperiod.Second,werepeattheexerciseforcoreinflation(excludingfoodandenergy)andobserveasimilarpattern,yettheimpactofbothshocksismuchlarger—0.72and0.83percentagepointsforoverallandprimarybalance,respectively.6

Next,wesplitthefullsampleofcountriesintoincomegroups—advancedeconomiesanddevelopingcountriesthatincludeemergingmarketeconomiesandlow-incomecountries,whichallowsustoobserveanintriguingpatternthatfiscalpolicyshocksareprimarilysignificantindevelopingcountries.7AspresentedinFigure4,headlineinflationincreasesby0.6percentagepointsinthefirstyearafterafiscalshockhitsandrisesto0.74percentagepointsonacumulativebasisafter4yearsindevelopingcountries,whilethereisamuchsmallerincreaseinheadlineinflationinadvancedeconomiesof0.44percentagepointsinthefirstyearand0.39percentagepointsoverthemediumrun.Inaddition,theimpactoffiscalshocksoncoreinflationismorepersistentindevelopingcountries.Adeteriorationofonestandarddeviationintheoverallbudgetbalanceisassociatedwithanincreaseincoreinflationindevelopingcountries:0.78percentagepointsinthefirstyearand1.5percentagepointsoverthemediumterm.Themagnitudeoftheseeffectsisevengreaterwhenwemeasurefiscalshockswiththeprimarybudgetbalance,whichisassociatedwithanincreaseof0.89percentagepointsinthefirstyearand1.71percentagepointsoverthemediumterm.

Wealsoanalyzetheinflationaryimpactoffiscalpolicyincommodity-exportingcountries8vs.othersandfindasignificantlygreatereffectoffisc