The Effects Of Fiscal Policy On Inflation Essay

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2.3.3 The evidences of the effects of fiscal policy on inflation Blejer and Cheasty (1988) hold the view that base on the the inflationary-financing model, a decrease of fiscal deficit will leads to reductions in inflation as deficits are assumed to be financed by the inflation tax. After that, more scholars e.g. Buiter (1987), Fischer (1980) and Pfajfar (2014) believe that fiscal deficits will lead to inflation. The reason is that the central government to finance the deficit can be carried out through taxation and borrowing and other non monetary and monetary form, but when the fiscal authorities implemented a series of actions that resulted in a sustained deficit, the central bank was forced to run its currency to the deficit and thus lead to inflation. When there is there is a huge fiscal deficit in a country within a certain period of time, if all or most of the deficit is made up by the central bank overdraft, it is bound to make the money supply more than economic growth and result the inflation. Therefore, the fiscal policy has an influence on the inflation to some extend. In the paper wrote by (De Haan and Zelhorst 1990), the relationship between government deficits and money growth since World War II in 17 developing countries was investigated. Although it lacks evidence to prove the hypothesis that the government deficits has significant effects on money supply in most countries, there is, however, some support for a positive relationship between budget deficits
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