When are fiscal deficits inflationary in low-income countries?

Open Access

Abstract

Previous research has found that the relationship between fiscal deficits and inflation is conditional on income levels: deficits tend to be inflationary in developing countries but not in advanced economies. We show that within low-income countries (LICs) the relationship is again conditional: only when relatively poor institutions fail to hold governments accountable to the general public are fiscal deficits inflationary in LICs.