Are budget deficits inflationary? A reconsideration of the evidence

Abstract

This paper returns to the issue of whether high budget deficits have had any inflationary consequences in Greece. In a recent paper, Hondroyiannis and Papapetrou (1997) report results denying any direct impact of the deficit on inflation. It is shown here that their evidence lacks weight owing to several modelling and estimation problems. Upon rectifying these problems, the results consistently suggest that, besides money growth, budget deficits have also played a significant and direct role in the Greek inflationary process. Thus, efforts to curtail budget deficits in Greece as required by the EMU should also prove useful in mitigating inflationary pressures.