Fiscal deficit and its impact on inflation, causality and co-integration

Abstract

The main objective of this paper is to observe the fiscal deficit and its impact on inflation for Myanmar and examine whether fiscal deficit effect directly or indirectly on inflation by using an econometric model for the period 1988-2015. The fiscal deficit in Myanmar continues to deteriorate and pose the long lasting for the growth in the longer time horizon. This study tried to examine the budget deficit’s impact on inflation not only in the long run but also in the short run. The long and short run estimations are investigated using Engle-Granger co-integration technique and error correction model. Two variables including Budget deficit to GDP ratio and inflation are used in this analysis. The data is collected from the Ministry of Finance and the World Bank. Through the analysis findings show that Growth in deficits positively Granger causes inflation. That’s why this observation concluded that the inflation causes the budget deficit and the budget deficit causes the inflation. There is bidirectional causal relationship in both inflation variable and budget deficit variable and exists a long run relationship between budget deficit and inflation from Engle-Granger cointegration test. Therefore, monetary and fiscal policy needs to coordinate with each other for curbing the inflation.