What Is the Relationship between Large Deficits and Inflation in Industrialized Countries?
Marco Bassetto, R. Andrew Butters
Examining industrialized countries, the authors find that large deficits are not associated with higher inflation contemporaneously, nor are they associated with the emergence of higher inflation in subsequent years. This finding suggests that countries that can afford large deficits have built solid reputations and institutions supporting a sound monetary policy and the reversion to a stable fiscal regime.
