Revisit the Budget Deficits and Inflation: Evidence from Time and Frequency Domain Analyses

Abstract

The purpose of this paper is to test the relationship between budget deficits and inflation for nine EU countries during the period of 1990-2013 using the quarterly data. Recently, the public deficits and inflation have had an increasing importance for developing/emerging and developed countries to build the stability macroeconomic performance in the long run. This study is the first attempt to determine the relationship between the inflation and budget deficits for nine EU countries using different bootstrap causality tests. We employ the bootstrap causality and Granger causality test in the frequency domain analysis which allows us to distinguish short and long-run causality. We do not find a relationship between these variables when we employ bootstrap causality analysis. While the frequency domain causality shows that there is no relationship causality from budget deficits to inflation for all countries, causality from inflation to budget deficits indicates a permanent (long-run) relationship for Belgium, and France.

Effects of Global Oil Price on Exchange Rate, Trade Balance, and Reserves in Nigeria: A Frequency Domain Causality Approach

“…This identified shortcoming in this area motivates the use of frequency domain analysis. Studies that have applied the frequency domain causality in the literature are Breitung and Candelon (2006) for the United States (US); Croux and Reusens (2013) for G-7 countries; Yanfeng (2013) for the Japanese economy; Tiwari et al (2015) for nine EU countries; Dergiades et al (2015) for seven selected European Union (EU) countries; Bayat et al (2015) for Czech Republic, Poland, and Hungary; Ozer and Kamisli (2016) for Turkey; Tiwari and Kyophilavong (2017) for India; and Bouri et al (2017b) for China and India. A more recent study was done by Huang et al (2018) for the US and nine EU countries.…”

A Note on Inflation Dynamics, Price Volatility, and Fiscal Activism

“…Bassetto and Butters (2010), for an OECD panel between 1970 and 2008, did not find evidence that budget deficits have preceded higher inflation. On the other hand, Tiwari et al (2015) used quarterly data for the period 1990-2013 for several OECD countries and reported frequency domain causality from inflation to budget deficits and a long-run relationship for Belgium and France.…”

The asymmetry effect of budget deficit and inflation in Nigeria

“…Empirically, plethora of studies has been conducted on the nexus between budget deficit and inflation with diverse outcomes (Kundrapam and Pattanaik, 2010;Cata˜o and Terrones, 2005;Lin and Chu, 2013;Mohanty and John, 2014;Jalil et al, 2014;Abu and Karim, 2015;Ishaq and Mohsin, 2015;Agoba et al, 2017;Ramu and Gayithri, 2017;Klein and Linnemann, 2020;Tiwari et al, 2015;Ahmad and Aworinde, 2019;Ssebulime and Edward, 2019;Ali andKhalid, 2019, Khan et al, 2020). In Nigeria, few studies have investigated the link between budget deficit and inflation (Olusoji and Oderinde, 2011;Awe and Olalere, 2012;Oseni and Sanni, 2016;Danlami et al, 2019;Apinran et al, 2019;Olaniyi, 2020;and Fasanya, Fajobi and Adetokunbo;2021).…”