Impact of Public Debt, Cashless Transactions on Inflation in Emerging Market Economies: Evidence from the COVID-19 Period

ABSTRACT

This study empirically analyzes the impact of public debt and cashless transactions on inflation in emerging market economies during the COVID-19 pandemic. Our research question is primarily motivated by the extensive fiscal spending and cashless transactions in these economies during the pandemic and the inflation spike in the mid of 2021. We use monthly data from 10 sample emerging market economies and panel vector auto-regressive models for analysis. Our findings show that (1) public debt has a positive impact on the inflation rate in the EMEs, and (2) cashless transaction exhibits a positive effect on overall inflation. (3) Further, cashless transactions and public debt are found to have a positive and significant impact on inflation in specific sectors such as Clothes and Footwear, Energy, and Transport.

KEYWORDS:

• Public debt
• Covid-19
• digital transactions
• inflation
• emerging market economies

JEL:

• H60
• E62
• E31

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

1. According to FTPL, the prices are determined by the present-value budget constraint of the government. If primary surpluses move automatically to assure fiscal solvency for any path the price level might take, prices are determined by money supply and demand, as per the Ricardian fiscal regime. On the other hand, if primary surpluses follow an arbitrary process and under the Non-Ricardian regime, then the equilibrium path of prices is determined by the requirement of fiscal solvency; that is, the price level has to ‘jump” to satisfy a present-value budget constraint (Canzoneri, Cumby, and Diba 2001; Woodford 1995).

2. McCormick et al. (2021) and Estevao and Essl (2022) depict that COVID-19 led to the largest one-year increase in debt, since World War 2 in 2020. Further, Horton and El-Ganainy (2009) noted that fiscal policy not only has impact on consumption and but it also influences the composition of spending, and additional spending and borrowing put too much pressure on inflation. Thus, it influences the inflation rate in the economy.

3. Based on the China Economic Information Center (CEIC) database availability.

4. We incorporated the money supply as robustness check as we have observed that during the pandemic period central banks’ balance sheet of have increased significantly (RBI 2022b). Rangarajan (2022) and Ranade (2022) argued that increase in central banks’ balance sheet has a risk to inflation. Thus, in order to ascertain, whether incorporating the money supply findings remains same or not. Thus, we incorporated the MS as a robustness test.