It’s Never Different: Fiscal Policy Shocks and Inflation

This paper investigates the impact of expansionary fiscal shocks on inflation, using a large panel of 140 countries over the period 1970–2022. We find evidence that expansionary shifts in the fiscal policy stance have inflationary consequences in the short run and over the medium term. The strength and persistence of inflation response, however, are not uniform across different types of countries and at different states of economic activity and fiscal space. First, we split the sample and observe an intriguing pattern that expansionary fiscal policy shocks are primarily significant in developing countries. Second, we find that the response to fiscal shocks differs significantly according to the level of fiscal space and whether the economy is in recession or not. Third, we obtain evidence showing that countries with inflation targeting or following explicit fiscal rules appear to be more resilient against inflation pressures caused by fiscal shocks.