Fiscal Explanations for Inflation: Any Evidence from Transition Economies?

Recent arguments, motivated partly by the new fiscal theory of price level, suggest that fiscal deficits undermine price stability in transition economies. This paper addresses these claims by examining vector-autoregressive models of inflation for three transition economies (Bulgaria, Romania and Russia). The results indicate that fiscal deficits have increased inflation in Bulgaria and Romania but not in the case of Russia. In Bulgaria and Romania, money aggregates and exchange rate have also been more influential to inflation than fiscal deficits. The analysis based on this method therefore suggests that while fiscal deficits have some influence on inflation, monetary factors mostly determine inflation in these three countries.