Are Deficit Inflationary? Role of Monetary and Financial Institutions: Empirical Evidence from Asian Economics
Author: Tahira Ishaq

Are deficit inflationary? This study employed System Generalized Method of Moments to analyze the inflationary impact of budget deficit for sampled Asian economies. Study utilized the theoretical framework of Neyapti (2003) to analyze the association between budget deficit and inflation. The primary objective of this research is to find whether inflation increases or decreases with budget deficit. Second objective is to investigate the role played by central bank independence and financial markets in explaining the inflationary impact of deficits. Asian economies are selected due to their peculiar nature that the central banks are not completely independent and furthermore financial markets are being reformed and developed. This positive transition of these emerging Asian economies is interesting to study for our hypothesis. Study utilizes the panel dataset from 1981-2010 on eleven Asian economies. Results show that deficits have inflationary impact both through direct and indirect mechanism. However indirect link growth in money supply is stronger and it enhances the significance of budget deficits in the selected Asian economies. On the other hand our results suggest that deficits are particularly inflationary when Central bank is partially independent and not enjoys freedom in following its targets as turnover rate (TOR) coefficient is significant and shows that political pressure is more severe than the legal structure that forces the financing of deficit through the creation of money. Secondly less developed and inefficient financial structure also plays role in explaining the inflationary impact of deficit as no other easy option exists for fiscal authority to finance its deficit other than Seigniorage. The major implication from this study reveals institutional structure should also be looked deeply in analyzing the inflationary impact of deficits. Supervisor:- Dr. Hassan M Mohsin

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Keywords : Asian Economies, Financial Institutions, Inflation, MONETARY POLICY
Supervisor: Hassan Muhammad Mohsin

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