How Does the Budget Deficit Affect Inflation Rate – Evidence from Western Balkans Countries

Abstract

The main purpose of this study is to investigate if determinants that we selected in our analysis have any effects on inflation rate in Western Balkans Countries[1] by using panel data for the period of 2001-2017, in yearly basis in total of 102 observation. The study used quantitative analysis approach and secondary data by applying the multivariate time series, respectively vector error correction model [VECM]. Multivariate time series was applied to investigate whether the budget deficit and other explanatory variable have any significant impact on inflation rate. The results from our analysis shows that three of four determinates that we used are significant on inflation rate. The model summaries statistics for inflation rate which shows that inflation rate has a moderate correlation with explanatory variables that we used in our model, that explanatory variables explain 45.5 percent of dependent variable and we can conclude that a model is a proper and fit. The results suggest that one percent point increase in budget deficit to GDP ratio is associated with about a 9.34 percent point increase in inflation rate. The overall inference is that the ratios that we selected has a significant influence on the inflation rate in Western Balkans Countries. 
 
 [1] Western Balkans Countries: Albania, Bosnia & Hercegovina, Kosovo, Montenegro, North Macedonia and Serbia.

How Government Outflow and Public Debt Affect Inflation: Evidence From See Countries

“…These substantiated arguments result in the fact that every increase per unit of PD_gdp will affect the reduction of the inflation rate by 1.26 units according to FE, and 1.03 units according to GMM. Analyzing the countries of the Western Balkans (Durguti 2020) in their study the determinants that cause inflation, have empirically argued that budget deficit, public debt, and real exchange rate have an impact on inflation. Also, the study conducted recently in this perspective by Amiola and Odhiambo (2021) using the empirical ARDL bounds approach including the observation period 1983-2018.…”

“…Whereas, the most recent study conducted by Durguti et al (2020) where it is explicitly treated using the VECM technique and ADF unit root test, there is a strong positive association among budget deficit, government debt, exchange rate, and inflation both in the short run and in the long run. Therefore, based on the analyzed studies the study has developed the following hypothesis: Ho: The increase in public debt has an important positive influence on inflation.…”

Econometric Evaluation of Public Debt on Inflation: Evidence From Kosovo and North Macedonia

“…Durguti et al (2020) analyzed the panel economies of the Western Balkans using the vector error correction model (VECM) technique from 2001 to 2017. The study analyzed the variables of the budget deficit, government debt, interest rate, and unemployment.…”