The Non-Linear Relationship Between Fiscal Deficits And Inflation: Evidence From Africa

Although, there is abundant research on the fiscal deficit-inflation relationship, little has been done to investigate the non-linear association between them, particularly in Africa. This study employs fixed-effects and GMM estimators to examine the non-linear relationship between deficits and inflation from 1999 to 2011 in 51 African economies, which are further grouped into high-inflation/low-income countries and moderate-inflation/middle-income countries. The results indicate that the deficit-inflation relationship is non-linear for the whole sample and sub-groups. For the whole sample, a percentage point increase in deficit results in a 0.25 percentage point increase in inflation rate, while the relationship becomes quantitatively greater once deficits reach 23% of GDP. The subsamples report different relationships. Although our results cannot be used as the base for generalization, we identify importance of grouping African countries according to their levels of inflation and/or income, rather than treating them as a homogeneous entity.