Academy of Economic Studies Doctoral School of Finance and Banking - PowerPoint PPT Presentation

About This Presentation
Title:

Academy of Economic Studies Doctoral School of Finance and Banking

Description:

Academy of Economic Studies Doctoral School of Finance and Banking DISSERTATION PAPER BUDGET DEFICIT AND INFLATION MSc. Student : Marius Serban Supervisor : Prof ... – PowerPoint PPT presentation

Number of Views:129
Avg rating:3.0/5.0
Slides: 29
Provided by: mari7231
Category:

less

Transcript and Presenter's Notes

Title: Academy of Economic Studies Doctoral School of Finance and Banking


1
Academy of Economic StudiesDoctoral School of
Finance and Banking
  • DISSERTATION PAPER
  • BUDGET DEFICIT AND INFLATION
  • MSc. Student Marius Serban
  • Supervisor Prof. Moisa Altar

2
Contents
  • I. Objective
  • II. The Model
  • III. Theoretical Considerations
  • IV. Econometric Results
  • V. Conclusion

3
I. OBJECTIVE
  • the influence of budget deficit on inflation rate
    in Romania
  • inflation has fiscal roots
  • how large are the effects of deficit cuts upon
    inflation

4
II. THE MODEL
  • a simple version of Woodford (2001) model
  • households maximize

with the private budget constraint
5
first order condition on ct, mt and bt
  • market clearing condition

ct gtyt
6

EQUILIBRIUM CONDITIONS
  • real interest rate (r) is assumed constant

7
II. THEORETICAL CONSIDERATIONSon how fiscal
deficit affects inflation
  • MONETARISTIC THEORY
  • FISCAL THEORY OF THE PRICE LEVEL

8
MONETARISTIC THEORY
  • fiscal dominance regime
  • seigniorage pull inflation
  • money demand equation determines the price level

9
FISCAL THEORY OF THE PRICE LEVEL
  • developed by Sargent and Wallace (1981), Leeper
    (1991), Dupor (1999), Woodford(1994,1995,1996,1998
    ), Cochrane (2001)
  • gouvernment budget constraint is the evaluation
    equation of the public debt and not a constraint

10
comparison with a stock
  • Bt ,gt and tt exogenous and have to meet certain
    restrictions
  • gouvernment budget constraint determines the
    price level

11
IV. ECONOMETRIC RESULTS
  • estimation of the gouvernment budget constraint
    which is accepted by both theories
  • special case no new debt is issued

12
  • starting from 1996 the public debt is relatively
    stable due to
  • - Asias crisis 1997
  • - Russias default in 1998
  • -debt payments due in 1999 were 1.9 mil.
  • -reduced demand on the domestic market

13
imposing the restriction on the public debt
results
  • the left term is real budget deficit (Dt/Pt)
  • the right term seigniorage (S)

14
  • estimated equation
  • nonlinear effect of budget deficit on inflation
    rate
  • the lower the monetary base the higher the effect
    of budget deficit

15
DATA
  • period 1991-2001
  • p - quarterly inflation rate (consumer price
    index)
  • D - quarterly budget deficit (mil.ROL)
  • M - end of quarter monetary aggregate M1 (mil.
    ROL)
  • BM - end of quarter money issuance from the
    balance sheet of the central bank (mil. ROL)

16
testing series stationarity
  • cannot reject the null hypothesis

17
testing cointegration - Johansen Test
PARAMETER ESTIMATION with M1
  • series are cointegrated starting from the last
    quarter of 1993

18
vector error correction model
19
residuals testing
INF Residuals period 1994-2001
INF Residuals period 1996-2001
0.15
0.15
0.10
0.10
0.05
0.05
0.00
0.00
-0.05
-0.05
-0.10
-0.15
-0.10
94
95
96
97
98
99
00
01
1996
1997
1998
1999
2000
2001
20
  • monetary aggregate M1 is 6 of GDP
  • 1procentual point reduction of the share of
    budget deficit in GDP results in 8.2 - 8.7
    procentual points reduction in annual inflation
    rate
  • the share of monetary aggregates in GDP is
    assumed constant

21
ESTIMATION WITH MONETARY BASE
  • testing cointegration - Johansen test

series are cointegrated starting from the last
quarter of 1993
22
vector error correction model
23
residuals testing
INF Residuals period 1994-2001
INF Residuals period 1996-2001
0.15
0.15
0.10
0.10
0.05
0.05
0.00
0.00
-0.05
-0.05
-0.10
-0.15
-0.10
94
95
96
97
98
99
00
01
1996
1997
1998
1999
2000
2001
24
  • monetary base is 4 of GDP
  • 1 procentual point reduction of the share of
    budget deficit in GDP results in 7.7 - 8.5
    procentual points reduction of the annual
    inflation rate

25
  • the adjustment term in VEC is 0.85 and 0.88
  • quick impact of the deficit upon inflation
  • the transmission channel is 2 quarters
  • MONETARIST THEORY
  • deficit gt excess money supply gt inflation
  • monetary policy cannot stimulate economy through
    this channel
  • FISCAL THEORY OF THE PRICE LEVEL
  • deficit gt ? aggregate demand gt inflation
  • expectations of future deficits
  • fiscal authority must commit to definitly cut
    deficits

26
GRANGER TEST
27
  • COMPARISON WITH OTHER STUDIES
  • Catao and Terrones (2001) estimate for 23
    emerging countries for period 1970-2000 with
    annual data
  • they found a mean estimator ? equal to 1/3 using
    M1 for money supply
  • 5.5 procentual points cut in inflation when the
    deficit in GDP is reduced with 1 procentual point
  • The difference is explained
  • ? is 0.52 because is obtained with quarterly data
  • including quasi-fiscal deficit could reduce the
    effect of deficit upon inflation

28
V. CONCLUSION
  • the budget deficit explains is the main cause of
    inflation
  • the low level of monetary base makes the deficit
    effect very powerful (an increase with 1
    procentuial point of the budget deficit in GDP
    raises annual inflation rate with 7.7-8.7
    procentual points
  • the adjustments of inflation to a fiscal shock
    takes place in 2 quarters
  • in the future a stricter fiscal discipline is
    required to reduce and maintain a low inflation
Write a Comment
User Comments (0)
About PowerShow.com