erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Are Fiscal Deficits Inflationary? Evidence for the EU

Carlos Vieira (Loughborough University, UK)

Abstract  

Are fiscal deficits inflationary? While the answer from conventional economic theory and from the monetary authorities is a conclusive yes, the evidence from the empirical literature is an unsettled maybe. This paper investigates the inflationary effect of central government deficits in a sample of six European Union members, namely Belgium, France, Germany, Italy, Netherlands and the UK, focusing on post-war annual data. Given the heterogeneous order of integration of the variables involved, the paper employs recently developed robust econometric methodologies, such as the bounds testing-ARDL approach, to examine the existence of a long-run relationship, and the LA-VAR causality analysis, to confirm the direction of causality. The results do not support the formulated hypothesis, suggesting the possibility of more flexible fiscal policies in the EU.

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