On the Low‐Frequency Relationship Between Public Deficits and Inflation |
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| Authors: | Martin Kliem Alexander Kriwoluzky Samad Sarferaz |
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| Institution: | 1. Economic Research Centre, Deutsche Bundesbank, Frankfurt, Germany;2. Department of Economics, Martin‐Luther‐Universit?t Halle‐Wittenberg, Germany;3. KOF Swiss Economic Institute, ETH Zürich, Switzerland |
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| Abstract: | We estimate the low‐frequency relationship between fiscal deficits and inflation and pay special attention to its potential time variation by estimating a time‐varying vector autoregression model for US data from 1900 to 2011. We find the strongest relationship neither in times of crisis nor in times of high public deficits, but from the mid 1960s up to 1980. Employing a structural decomposition of the low‐frequency relationship and further narrative evidence, we interpret our results such that the low‐frequency relationship between fiscal deficits and inflation is strongly related to the conduct of monetary policy and its interaction with fiscal policy after World War II.Copyright © 2015 John Wiley & Sons, Ltd. |
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