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A NOTE ON INFLATION DYNAMICS, PRICE VOLATILITY, AND FISCAL ACTIVISM

Published online by Cambridge University Press:  22 February 2019

António Afonso  and
João Tovar Jalles
António Afonso
Affiliation:
ISEG-UL—Universidade de Lisboa
João Tovar Jalles*
Affiliation:
Centre for Globalization and Governance
*
Address correspondence to: João Tovar Jalles, Centre for Globalization and Governance, Nova School of Business and Economics, Campus Campolide, Lisbon 1099-032, Portugal. UECE—Research Unit on Complexity and Economics. e-mail: [email protected].
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Abstract

Using a panel of 54 countries between 1980 and 2013, we find empirical support for the view that changes in the fiscal policy stance (year-on-year change in the cyclically adjusted primary balance) have a significant positive correlation with inflation volatility. An increase in the volatility of discretionary fiscal policies by one standard deviation raises inflation volatility by about 6%. Moreover, results using alternative inflation volatility proxies confirm that an expansionary fiscal stance increases price volatility. Another relevant outcome is that in a context of economic expansions (recessions) the harmful impact of fiscal activism on price volatility is soft (heightened), while the negative impact of fiscal activism on price stability is higher when fiscal policy is expansionary. Finally, fiscal activism fuels inflation volatility much more pronouncedly in emerging market economies vis-à-vis advanced economies.

Keywords

Consensus ForecastsFiscal PolicyGARCHInflationVolatility
Type
Notes
Information
Macroeconomic Dynamics , Volume 24 , Issue 5 , July 2020 , pp. 1299 - 1313
Copyright
© Cambridge University Press 2019

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Footnotes

We are grateful to the editor and one anonymous referee for useful comments and suggestions. The opinions expressed herein are those of the authors and do not necessarily reflect those of their employers. Any remaining errors are the authors’ sole responsibility. UECE is supported by FCT (Fundação para a Ciência e a Tecnologia, Portugal).

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