A Study On The Relationship Between Fiscal Deficits And Inflation

The relationship between fiscal deficits and inflation is a problem of long-term concern in the theory circle. With the relationship between fiscal deficits and inflation in different ways fiscal deficits being made up, there is dispute in the academia. Through theoretic analysis and empirical analysis, this paper concludes that both fiscal deficits being made up by issuing money and fiscal deficits being made up by issuing debt would probably lead to inflation. Besides which way fiscal deficits being made up, several other factors such as the scale of fiscal deficits, the targets and implementation of economic policy, and the kind of government bonds' subscriber will also affect the relationship between fiscal deficits and inflation. In China, the scale of fiscal deficits has been within the limited scope for a long period. The paper's empirical investigation suggests that fiscal deficits are not main reason for inflation even when fiscal deficits made up by issuing money. Since fiscal deficits began being made up by issuing debt, although the scale of the fiscal deficits has expanded, it does not show having apparent effect on price variety. Currently, controlling the scale of fiscal expenditures, preserving important status of price stabilization in economic policy's targets' colligation, and resisting the impacts on public finance and economy by the supply change of the important strategic resources are all good for keeping fiscal deficits from leading to inflation.