Fiscal deficits and inflation risks：the role of fiscal and monetary policy regimes -bis（英文）行业资料

BISWorkingPapers

No1028

Fiscaldeficitsandinflationrisks:theroleoffiscalandmonetaryregimes

byRyanBanerjee,ValerieBoctor,AaronMehrotraandFabrizioZampolli

MonetaryandEconomicDepartmentJuly2022

JELclassification:E31;E52;E62;E63.

Keywords:Fiscaldeficit,inflation,fiscalmonetarypolicyregime,monetarypolicy

policyregime,independence.

ISSN1020-0959(print)

ISSN1682-7678(online)

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ThispublicationisavailableontheBISwebsite().

©BankforInternationalSettlements2022.Allrightsreserved.Briefexcerptsmaybe

reproducedortranslatedprovidedthesourceisstated.

Fiscaldeficitsandinflationrisks:theroleoffiscaland

monetaryregimes*

RyanBanerjeetValerieBoctor主AaronMehrotra§FabrizioZampolli闻July1,2022

Abstract

Usingdatafromapanelofadvancedeconomiesoverfourdecades,weshowthattheinflationaryeffectoffiscaldeficitscruciallydependsontheprevailingfiscal-monetarypolicyregime.Underfiscaldominance,definedasaregimeinwhichthegovernmentdoesnotadjusttheprimarybalancetostabilisedebtandthecentralbankislessindependentorputslessemphasisonpricestability,theaverageeffectoninflationofhigherdeficitsisfoundtobeuptofivetimeslargerthanundermonetarydomi-nance.Underfiscaldominance,higherdeficitsalsoincreasethedispersionofpossiblefutureinflationaryoutcomes,especiallytheprobabilityofhighinflation.Basedonforecastsfromourmodel,thehighinflationexperiencedbymanycountriesduringtherecoveryfromtheCovid-19pandemicappearsmoreconsistentwitharegimeoffiscaldominancethanmonetarydominance.

JELCodes:E31;E52;E62;E63.

Keywords:Fiscaldeficit,inflation,fiscalpolicyregime,monetarypolicyregime,monetarypolicyindependence.

*Wearegratefulforcomments,suggestions,anddiscussionstoDavidArcher,Agust´ınCarstens,YuriyGorodnichenko,LuizPereira,HyunSongShin,seminarparticipantsattheUniversityofCaliforniaatBerkeleyandtheBIS,aswellasparticipantsattheCEFConferenceinDallas,June2022.WealsothankBereniceMartinezforexcellentresearchassistance.TheviewsexpressedinthepaperarethoseoftheauthorsanddonotnecessarilyreflectthoseoftheBankforInternationalSettlements.

tBankforInternationalSettlements.E-mailaddress:ryan.banerjee@

主UniversityofCalifornia,Berkeley.E-mailaddress:valerieboctor@

sBankforInternationalSettlements.E-mailaddress:aaron.mehrotra@

"BankforInternationalSettlements.E-mailaddress:fabrizio.zampolli@

2

1Introduction

GovernmentsunleashedamassivewaveoffiscalstimulusinthewakeoftheCovid-19

pandemic,leadingtoincreasesingovernmentdebtofaround15percentagepointsofglobalGDPbetween2019and2021.Thesedevelopmentshavetriggeredadebateabouttheinflationaryconsequencesofcurrentfiscalpolicies(eg

Krugman

(

2021

),

Summers

(

2021

)).

TheEconomist

(

2021

)hasaskedwhetherinflationisafiscalphenomenon.Andsomecommentatorsevenarguedthattheneedtomanagethehighlevelsofpublicdebtmightresultinfiscaldominanceovermonetarypolicy,posingarisktopricestability(eg

Landau

(

2021

)).

Toinvestigatethecontributionoffiscalpolicytotherecentincreaseininflation,weestimateanopeneconomyPhillipscurveaugmentedwiththefiscalbalanceusingdatafrom21advancedeconomiesoverfourdecades.Apartfromtheeconometricspecification,whatdistinguishesouranalysisfrompreviousresearchisthecarefulconsiderationofthepolicyregimeinplace.Asakeyresult,wehighlightthatthestrengthofthefiscaldeficit-inflationrelationshipcruciallydependsonthefiscal-monetarypolicyregimeinplace.

Severalstreamsofresearchsuggestthatthisshouldbethecase.Therecentliteratureonfiscalmultipliersshowsthatthestrengthofthemacroeconomiceffectsoffiscalpolicycruciallydependsonhowafiscalexpansionisfinancedandhowmonetarypolicyresponds(seeeg

Leeper

(

1991

);

Woodford

(

2011

);

ErcegandLind´e

(

2014

);

Ramey

(

2019

)).Bothfactorsdependonthepolicypriorities,incentivesandinstitutionalconstraintsfacedbyfiscalandmonetarypolicymakers.Whenacountrycontinuestorunlargefiscaldeficits,anyattemptbythemonetaryauthoritytocontrolinflationmayeventuallyleadtohigherfutureinflation(

SargentandWallace

(

1981

)).Similarly,whenfiscalpolicyisunsustainable,thefiscaltheoryofthepricelevelshowsthatthepriceleveladjuststore-establishthegovernment’sintertemporalbudgetconstraint.Forexample,

Leeper

(

1991

),andmore

3

recently

Leeperetal.

(

2017

),showthatmacroeconomicequilibriacruciallydependonthemonetary-fiscalpolicyregimeinplace.

1

Inouranalysisweconsidertheinfluenceofbothfiscalandmonetarypolicyregimesontheinflationaryeffectsoffiscaldeficits.Toclassifythoseregimesweusebothdefactoanddejuremeasures.Astothefiscalregimes,ourdefactoclassificationisbasedontheresultfromtheseminalpaperby

Bohn

(

1998

)whichshowsthatfiscalpolicysatisfiesthegovernment’sintertemporalbudgetconstraintwhentheprimarysurplusisanincreasingfunctionofthelevelofdebtrelativetoGDP.Inourbaselinespecificationwefollow

Mauro

etal.

(

2015

)whooperationalise

Bohn

(

1998

)byestimatingfiscalreactionfunctionsinapanelofeconomies.Theauthorsclassifytheregimesaseither“prudent”or“profligate”dependingonwhethertheestimatedresponseoffiscalsurplusesisincreasinginthelevelofdebtwithinagivenwindow.Wealsoconsiderdejureclassificationsoffiscalregimesbasedonwhethertheeconomyhasinplaceafiscalruleforthebudgetbalance-thatis,legalnumericallimitsontheoverallbalance,thestructuralorcyclicallyadjustedbalance,orthebalanceoverthecycle.

Astomonetarypolicyregimes,welookatwhethermonetarypolicyactstomaintainpricestability.Ourdejureclassificationofmonetarypolicyregimesisbasedonwhetheracentralbankisclassifiedasbeinghighlyorweaklyindependent.

Cukierman

(

1992

)and

Cukiermanetal.

(

1992

)showthatthedegreeofcentralbankindependenceisnegativelycorrelatedwithinflationinadvancedeconomies.Thespecificmeasuresweusecomefrom

Romelli

(

2022

)whofollowstheentiresetoflegislativechangestolawsconcerningthe

centralbank.Giventheparticularimportanceofmonetaryaccommodationoffiscalpolicy,

1IntheUnitedStates,

BianchiandIlut

(

2017

)findthatmonetarypolicyaccommodationoffiscalpolicyduringthe1960sand1970swasanimportantdriverofhighinflation.Moreover,theyfindthattightmonetarypolicyonitsownwasnotsufficienttostabiliseinflation,notingthatinflationintheUnitedStatesdroppedonlywhenagents’beliefschangedaboutthegovernment’sdesiretostabilisedebt.Ourpaperisalsorelatedtoearlierresearchby

CataoandTerrones

(

2005

)whofoundasignificantlinkbetweenpersistentfiscaldeficitsandinflationamongdevelopingandemergingmarketeconomiesbutaweakoraninsignificantrelationshipforadvancedeconomies.Incontrastwiththisstudy,wefocusontheshort-terminflationaryimpactandonitscrucialdependenceonthefiscal-monearypolicyregime.

4

Figure1:Theinflationaryimpactoffiscalstimulusacrossfiscalandmonetaryregimes.Thefigureshowstheestimatedaverageimpactofaonepercentagepointincreaseinthefiscaldeficitoninflationoverthenexttwoyearsacrossdifferentcombinationsoffiscalandmonetaryregimes.Fiscalregimesareclassifiedasprudentorprofligatebasedon

Mauroetal.

(

2015

).Monetaryregimesaredefinedasbeinghighorlowindependencebasedonlegallimitationsoncentralbanklendingtothepublicsectorin

Romelli

(

2022

).

.

ourbaselinedejuremeasureisbasedonspecificlimitationsoncentralbanklendingtothepublicsectorenshrinedincentralbanklaws.Ourdefactomeasureofthemonetarypolicyregimeisbasedonwhetherthecentralbank’spolicyinterestrateisbelowthatsuggestedbyaTaylorrule(

Taylor

(

1993

)).AnumberofstudieshaveshownthatfailuretosatisfytheTaylorprinciple,i.e.notadjustinginterestratesbymorethanwithinflation,resultedininflationinstabilityintheUnitedStatesduringthe1960sand1970s(seeforexample

Taylor

(

1999

),

Claridaetal.

(

2000

)and

DavigandLeeper

(

2007

)).

Ourresultsshowthattheregimesmatter.

Figure1

showsthattheestimatedaverageeffectofanincreaseintheoverallfiscaldeficitoninflationdiffersstronglyacrossthefourcombinationsoffiscalandmonetarypolicyregimesthatweconsider.Thelowestinflationaryeffectisfoundinregimeswithaprudentfiscalauthoritythatstabilisesdebtlevelstogetherwithanindependentcentralbankwithstronglegallimitationsthatpreventlendingtothepublicsector.Inthisregimewhichwedefineas“monetarydominance”,aonepercentagepointincreaseinthefiscaldeficitresultsina10basispointincreaseinthe

5

averageinflationrateoverthenexttwoyears.

2

Bycontrast,thegreatestinflationaryeffectisfoundintheregimewhichwedefineas“fiscaldominance”,i.e.inwhichfiscalpolicyisprofligateandthecentralbankfaceslimitedconstraintsonlendingtothepublicsector.Underfiscaldominance,aonepercentagepointincreaseintheoveralldeficitraisestheinflationratebyaround50basispoints,overfivetimeshigherthaninthemonetarydominanceregime.

Theaverageinflationaryeffectsofhigherdeficitsintheothertworegimesliesomewherebetweenthemonetarydominanceandfiscaldominanceregimes.Theeffectofdeficitsintheprudentfiscalpolicyandlowmonetaryindependenceregimeishigherthanintheprofligatefiscalregimewithhighmonetarypolicyindependence(wheretheeffectis,moreover,notstatisticallysignificant).Thislatterresultisperhapssurprising.Asshownin

Sargentand

Wallace

(

1981

)or

Leeper

(

1991

),anyattemptbyacentralbanktocontrolinflationwhenfiscalpolicyisnon-Ricardianleadstoexplosiveinflationarydynamics.However,unlikeinmanytheoreticalmodels,theregimesinourempiricalanalysisarenotfixedorpermanent.

Beyondanalysingtheaverageeffect,wefurtherexaminehowfiscalandmonetarypol-icyregimesaffectinflationrisksacrosstheentireinflationforecastdistributionusingtheinflation-at-riskmethodologydevelopedin

Banerjeeetal.

(

2020

).Wefindsignificantnon-linearitieswithparticularlylargeupsideinflationrisksfollowinganincreaseinfiscaldeficits.Theupsideinflationrisks,aswellastheoverallvarianceofinflation,areconsiderablyhigherinthefiscaldominanceregimecomparedtoamonetarydominanceregime.

Thedifferencesininflationbehaviourinthefiscalandmonetarydominanceregimesgobeyondtherelationshipbetweendeficitsandinflation.Inthefiscaldominanceregime,theaveragesensitivityofinflationtooutputgrowthisaroundthreetimeslargerthaninthemonetarydominanceregime.Thesensitivityisevenhigherintheuppertailsofthe

inflationdistribution.

2Thereisnouniformdefinitionofmonetaryandfiscaldominanceintheliterature,seee.g.thediscussionin

Jeanne

(

2012

).

6

Finally,weuseourmodeltoshedlightontheseeminglyunexpectedburstofinflationacrossadvancedeconomiesfollowingtheCovid-19pandemic.Thelargefiscalandmonetarypolicystimulusthattookplacein2020mayhaveoccurredagainstthebackdropoflaxerfiscalandmonetarypolicyregimes,whicharemoretolerantofhigherandrisingpublicdebtandpositivedeviationsofinflationfromtarget,respectively.Giventhesizeofthefiscalstimulusandothermacroeconomicvariablesobservedin2020,forecastsfromourmodelsuggestthatthehighinflationoutcomesin2021and2022appearmoreconsistentwitharegimeoffiscalratherthanmonetarydominance.

Theremainderofthepaperisstructuredasfollows.

Section2

describestheestimationmethodology,theclassificationofregimesandthedata.

Section3

presentsourbaselineresults,and

Section4

showsrobustnesstestsandextensions.Finally,

Section5

usesourestimatedmodelstoexaminehowfiscalandmonetarypolicyregimesmayhavecontributedtotheburstofinflationin2021and2022.

Section6

concludes.

2Methodology

WeexaminetheeffectsoffiscaldeficitsoninflationbyestimatingPhillipscurve-typemodelsaugmentedwithfiscaldeficits,usingpaneldata.Weestimatesimplelinearmodelsaswellasquantileregressionsthatallowustoevaluateinflationtailrisks.Themodelsareestimatedconditionalonfourpolicyregimesthatfeaturedifferentcombinationsoffiscalandmonetarypolicy.Inthissection,wefirstdescribetheestimatedmodels,thentheconstructionofthefourpolicyregimesand,finally,thedata.

7

2.1Econometricapproach

Ourbaselinespecificationtoevaluatetheeffectsofdeficitsonfutureinflationisasfollows:

πi,t+1,t+2=ai+Xtβ+∈it.

(1)

wherethedependentvariableπi,t+1,t+2isasimpleaverageofone-andtwo-year-aheadheadlineinflationincountryi.αidenotescountryfixedeffectsandXi,tisavectorofexplanatoryandcontrolvariables:

Xt=(∆defit,πit,∆yit,∆excit,∆oilit).(2)

Themaincovariateofinterestis∆defit,whichrepresentstheyear-on-yearchangeinfiscaldeficitasapercentageofGDP.πitisthecurrentlevelofheadlineinflation,year-on-year;

3

∆yitdenotestheyear-on-yearlogchangeinrealGDP;∆excitisthelogchangeinthenominaleffectiveexchangerate,withanincreaseinexcitdenotinganappreciation;and∆oilitdenotesthelogchangeinoilpricesdenominatedinlocalcurrency.Allvariablesinlogchangesareexpressedaspercentages.Themodelisestimatedbyordinaryleastsquares.

Inordertoexaminethepossibilitythatchangesinfiscaldeficitsleadtogreatertailrisksofinflation,weusenovelmethodsforpanelquantileregressionswithfixedeffects(see

MachadoandSantosSilva

(

2019

)).Webeginwiththefollowinglocation-scalemodel:

πi,t+1,t+2=αi+Xtβ+(δi+Xtγ)Uit,

(3)

3Whileweusetheheadlineinflationrate,wealsocheckedthatourresultsholdifwecomputetheinflationrateasthelogchangeintheCPIindex.

8

whereπi,t+1,t+2andXi,taredefinedasbefore.Inthismodel,inflationineachcountryiisallowedtodifferintermsoflocation,ai+Xitβ,andscale,δI+Xtγ.Theparametersαiandδidenotecountryifixedeffects.αiisthetime-invariantaveragelevelofinflationwithincountryi.δiisacountry-specific,time-invariantscalingparameterofthedistributionofU,whichhasthesamepropertiesforalliandt.FromEq(

3

),wehavePr[δi+Xtγ>0]=1.Thesequence{Xit}isassumedtobestrictlyexogenous.Uitareunobservedrandomvariables,iidacrosscountriesiandyearst,orthogonaltoXitandnormalisedtosatisfyE[U]=0andE[|U|]=1.

Weobtaintheconditionalquantilesforinflationoverthenexttwoyearsusing:

Qm(τ|Xit)=(αi+δiq(τ))+Xtβ+Xtγq(τ),(4)

wherethescalarαi(τ)=αi+δiq(τ)isthequantile-τfixedeffectforeconomyi.αi(τ)capturesthetime-invarianteffectofindividualcountrycharacteristicsthatpotentiallyvarydependingonwherethecountryliesintheconditionalinflationdistribution.Weestimatethecoefficientsfor5quantiles:5%,25%,50%,75%and95%.Theconfidenceintervalsareestimatedbyusingablockbootstrappingwith1,000replications,clusteringoncountry.

Foragivencountryandyear,eachpredictedquantilefromEq(

4

)representsapointintheCDFF(·)oftheinflationforecast.Toaddressnoiseinourquantileestimates,following

Adrianetal.

(

2019

),weinterpolatesemiparametricallythepredictedquantilesusingtheskewedt−distribution(see

AzzaliniandCapitanio

(

2003

)).Thedistributionisdescribedbythefollowingfunction:

f(π;µ,σ,α,ν)=t╱、T╱α1一au)2;ν+1、.(5)

InEq(

5

),t(·)andT(·)arethePDFandtheCDFofthedistribution,respectively.

9

Thedistributionalparametersµ(location),σ(scale),ν(kurtosis),andα(skewness)areestimatedforeachcountry-yearpairbyminimisingthemeansquarederrorbetweenthefivepredictedquantilesandthedistribution-impliedvalues.Inotherwords,weselectparameterestimatesthatminimizethefollowingobjectivefunction:

(it+h,it+h,it+h,it+h)=argmin

(Qˆmt│h)女t(τ|xt)−F一1╱τ;µ,σ,α,ν)、2.

(6)

T

2.2Fiscalandmonetarypolicyregimes

Weestimatethemodels–boththelinearmodelandtheoneforinflation-at-risk–separatelyfordifferentcombinationsoffiscalandmonetarypolicy.Inparticular,wedistinguishbetweenfourpossiblepolicycombinations:“prudent”or“profligate”fiscalpolicycombinedwith“high”or“low”monetarypolicyindependence.

2.2.1Definingthefiscalregime

Forthebaselinespecification,thefiscalregimesarebasedonadefactomeasure.Weusees-timatesofafiscalpolicyreactionfunctionthatconsiderstheresponseofprimarysurplusestothedebt-to-GDPratio(see

Bohn

(

1998

)).Apositiveresponseisasufficientconditionforfiscalpolicytobesustainable,inthesensethatthegovernment’sintertemporalbudgetconstraintholds.Foragivencountry,thefiscalreactionfunctionis:

st=ρdt+αZt+εt,(7)

wherestdenotestheprimarysurplusanddtdenotesthelevelofgovernmentdebt-to-GDPatthebeginningoftheperiod.Ztisavectorofcontrolvariablesthataffecttheprimarybalance,suchasthebusinesscycle,thetransitorycomponentofgovernmentspendingand

commodityprices.

10

Inthebaselinemodel,weusetheestimatesin

Mauroetal.

(

2015

)whooperationalisetheapproachin

Bohn

(

1998

).Inparticular,

Mauroetal.

(

2015

)estimatefiscalreactionfunctionsforapanelofcountriesbasedon25-yearrollingregressions.Periodsofprudent(profligate)fiscalpolicyarethendefinedasthosewithρ>0(ρ<0),onconditionofastatisticallysignificantcoefficientataminimumof5%level.

Inadditiontoprovidingasufficientstatisticonwhetherthegovernment’sintertem-poralbudgetconstraintholds,theapproachhasanumberofadvantages.Governmentdebt-to-GDPratiosareaffectedbytemporaryshocks,suchaswartimespendingorbusi-nesscyclefluctuations,whichmakeitdifficulttodetectviolationsoftheintertemporalbudgetconstraintbasedondevelopmentsofdebtalone(see

Bohn

(

1998

)).

4

Moreover,theapproachisrobusttochangesingrowthrates(g)andinterestrates(r),anddifferentdebtmanagementpolicies.However,therelationshipbetweengrowthrates,interestratesandρmatterforthetrajectoryofdebt.Inparticular,ifρ>(r−g/1+r),thedebtratioisstationaryandreturnstoitsinitiallevelafterashock.WealsonotethatconsideringaregressionofthetypeinEq(

7

)impliesclosecorrespondencewithstructuralmodelsthatfeaturedifferenttypesofbehaviourofthefiscalauthority.Forexample,in

Bianchiand

Ilut

(

2017

),passive(active)fiscalpolicyisdefinedasonewherethefiscalauthorityis(not)committedtostabilisingdebtbyadjustingtaxes.

Asnotedby

Mauroetal.

(

2015

),theapproachin

Bohn

(

1998

)wasdevelopedagainstthebackdropofrisingdebt.Ifthedebtratioisdeclining,therejectionofapositiveandstatisticallysignificantρwouldindicatethattheintertemporalbudgetconstraintisviolated,butinasenseofover-accumulatingpublicassetsratherthanincurringexcessiveliabilities.Thatsaid,overoursampleperiod,debtratiosweremostlyontherise.Inparticular,consideringall25-yearchangesindebtratios,increasingdebtratioswerefour

timesmorefrequentthandecreasingones,withrisingdebtratiosovertwotimeslargerin

4Indeed,aswediscussinthenextsection,inthemonetarydominanceregimewherefiscalpolicyissustainable,debtlevelsareonaveragehigherthaninthefiscaldominanceregime.

11

absolutevaluethandecreasingones.(Theaverage25-yearchangesare38and18percentagepoints,respectively.)

Asarobustnesstest,wealsoconsiderdejureclassificationsoffiscalregimesbasedonwhethertheeconomyhasinplaceafiscalruleforthebudgetbalance-thatis,legalnumericallimitsontheoverallbalance,thestructuralorcyclicallyadjustedbalance,orthebalanceoverthecycle.

2.2.2Definingthemonetaryregime

Astomonetarypolicy,thebaselineregimesarebasedondejureindicatorsofcentralbankindependence.Giventheparticularimportanceofmonetaryaccommodationoffiscalpolicy,ourmainmeasureisbasedonspecificlimitationsoncentralbanklendingtothepublicsectorenshrinedincentralbanklaws.

5

Grillietal.

(

1991

)notethatifthegovernmentisabletoinfluencethequantityandconditionsonwhichitborrowsfromthemonetaryauthority,itaffectsthecreationofbasemoneyanddecreasesthecentralbank’seconomicindependence.Similarly,

Cukiermanetal.

(

1992

)consideracentralbankwithtighterrestrictionsonlendingtothepublicsectortobemoreindependenttopursuethepricestabilityobjective.Theauthorsarguethatprovidingcredittothegovernmentwouldlikelybeanimportantchannelbehindtherelationshipbetweenthelackofcentralbankindependenceandinflation.

Thespecificmeasuresoncentralbankindependenceweusecomefrom

Romelli

(

2022

)whofollowstheentiresetoflegislativechangestolawsconcerningthecentralbankovertime.Asindicesproposedinearlierliteratureweregenerallycomputedatspecificpoints

intime,theydonotcapturethefullsetofreforms.Foragivencountry-yearobservation,

5Inadditiontocapturingrestrictionsoncentralbankpurchasesofgovernmentdebtsecuritiesintheprimarymarket,theindicatorcoversanumberofotherdimensions,suchaswhetherstrictamountsonloansexistandwhethertheloantermsarecontrolledbythecentralbank;iftheborrowercanonlybegovernmentoralsootherpublicsectorinstitutionssuchasstate-ownedenterprises;whetherinterestratesaremarket-determined;andifthematuritiesarelimitedandclearlyspecifiedinthecentralbanklegislation.

12

weclassifymonetarypolicyindependencetobelow(high)iftheindicatorisbelow(above)themedianofallcountry-yearobservationsduringthesampleperiod.

Inourcase,giventhatweareinterestedintheeffectofdeficitsoninflation,consideringanexogenousindicatorsuchascentralbankindependencetoclassifythemonetaryregimeisarguablypreferabletomoreendogenousalternatives,suchasusingthedefactodegreeofinflationstabilisation,forexample.Thatsaid,inrobustnesstests,weuseanalternativedefactomeasureofthemonetarypolicyregime,capturingthedegreetowhichmonetarypolicyactstostabiliseinflation.Inparticular,wedefinetheregimebasedonwhetherthecentralbank’spolicyinterestrateisbelowthatsuggestedbyaTaylorrule(

Taylor

(