AcademyofEconomicStudiesDoctoralSchoolofFinanceand.pptVIP

Academy of Economic StudiesDoctoral School of Finance and Banking DISSERTATION PAPER BUDGET DEFICIT AND INFLATION MSc. Student : Marius Serban Supervisor : Prof. Moisa Altar Contents I. Objective II. The Model III. Theoretical Considerations IV. Econometric Results V. Conclusion I. OBJECTIVE the influence of budget deficit on inflation rate in Romania inflation has fiscal roots how large are the effects of deficit cuts upon inflation II. THE MODEL first order condition on ct, mt and bt II. THEORETICAL CONSIDERATIONSon how fiscal deficit affects inflation MONETARISTIC THEORY FISCAL THEORY OF THE PRICE LEVEL MONETARISTIC THEORY fiscal dominance regime seigniorage pull inflation money demand equation determines the price level FISCAL THEORY OF THE PRICE LEVEL developed by Sargent and Wallace (1981), Leeper (1991), Dupor (1999), Woodford(1994,1995,1996,1998), Cochrane (2001) gouvernment budget constraint is the evaluation equation of the public debt and not a constraint comparison with a stock IV. ECONOMETRIC RESULTS estimation of the gouvernment budget constraint which is accepted by both theories special case : no new debt is issued starting from 1996 the public debt is relatively stable due to - Asia’s crisis 1997 - Russia’s default in 1998 -debt payments due in 1999 were 1.9 mil. $ -reduced demand on the domestic market imposing the restriction on the public debt results : DATA period 1991-2001 π - quarterly inflation rate (consumer price index) D - quarterly budget deficit (mil.ROL) M - end of quarter monetary aggregate M1 (mil. ROL) BM - end of quarter money issuance from the balance sheet of the central bank (mil. ROL) testing series stationarity testing cointegration - Johansen Test vector error correction model residuals testing ESTIMATION WITH MONETARY BASE vector error correction model residuals testing V. CONCLUSION the budget deficit explains is the main cause of inflation the low level of monetary base makes the deficit effect ver