Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282531 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10843
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We examine the relationship between inflation and fiscal sustainability with a two-step approach. In the first step, we estimate to estimate a country-specific time-varying measure of fiscal sustainability using the fiscal reaction function. This function captures the response of the primary balance to changes in the public debt ratio. In the second step, we examine how various measures of inflation such as headline inflation, core inflation, energy inflation, and food inflation affect the estimate of fiscal sustainability found previously. Our findings indicate that higher inflation rates contribute positively to the measure of fiscal sustainability, specifically through core inflation causing an improvement in fiscal sustainability, while the effect of energy inflation is conversely found to be negligible or even negative. These results imply that the initial burst of inflation caused by the energy price shock in 2021 probably did not help improve fiscal sustainability, whereas the subsequent high core inflation had a positive effect.
Subjects: 
fiscal sustainability
fiscal reaction function
time-varying coefficients
euro area
inflation
core inflation
panel data
JEL: 
C23
E31
E62
H50
H62
Document Type: 
Working Paper
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