Public debt, inflation, and the Fiscal Theory of Price Level in emerging markets: the case of Paraguay

Abstract

This paper investigates the link between public debt and inflation considering the Fiscal Theory of Price Level (FTPL) with data from Paraguay. Unlike other studies, the paper also considers this relationship according to the monetary regime. The fiscal policy actions are evaluated in a monetary structural vector autoregressive combined with fiscal variables and interpreted using impulse responses. The results highlight the importance of differentiating the monetary regime while conducting the analysis. In the monetary aggregate regime with an active fiscal policy, higher public debt shocks produce inflationary pressures. Conversely, with the inflation targeting sample estimation, inflation follows its targeted path.

Testing the Fiscal Theory of Price Level for Türkiye with Fourier-Based Empirical Approaches

“…On the other hand, the situation is different for developing countries. It is possible to say that empirical tests of FTPL assumptions are mostly found valid for developing countries (Tanner and Ramos, 2003;Favero and Monacelli, 2005;Javid et al, 2008;Chuku, 2010;Akram et al, 2011;Urquhart, 2022). Empirical findings point to a similar situation for Türkiye.…”

“…Moreover, in studies that include the period 2008 global financial crisis, transitions from an R. regime to N.R. regimes or N.R regimes were determined (Afonso and Toffano, 2013;Doi, 2018;Panjer et al, 2020;Urquhart, 2022). In equation 2, the primary budget surplus on the right side of the equation is determined arbitrarily, and it is argued that the price level on the left side of the equation will "jump" corresponding to the fiscal payment requirements.…”

The fiscal theory of the price level: The case of Morocco

“…According to the fiscal theory of price level, a state's fiscal authority primarily affects the level of prices in its economy (Urquhart, 2022). The fiscal and monetary authorities are the two parties who, in theory, are in charge of this.…”

“…Among the many factors that contribute to inflationary tendencies in an economy, including monetary shocks, structural shocks, demand shocks, external shocks, and demographic changes, government fiscal policy measures are also linked to the consumer price index. This topic is important because of the COVID-19 environment, which forces governments to take on debt to stimulate economic growth (Fiedler, Gern, & Stolzenburg, 2020;Urquhart, 2022).…”