Fiscal policy and inflation expectations

Produced by: 
Banco Central del Uruguay
Available from: 
April 2020
Paper author(s): 
Miguel Mello
Jorge Ponce
Topic: 
Fiscal Policy - Public and Welfare Economics
Year: 
2021

We find empirical evidence of a positive correlation between the budget deficit to GDP and inflation expectations of price setters in Uruguay. It implies an interdependence between fiscal and monetary policies: monetary policy faces more challenges to maintain inflation expectation anchored when the fiscal outcome worsen. The result is robust to considering other fiscal variables and to controlling for macroeconomic covariates. During the period under analysis, however, monetary policy has been effective to compensate the distortions introduced by fiscal policy on inflation expectations.

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