Fiscal deficit, economic growth and inflation, an exogenous relationship?

Abstract

This paper deals with the relationship between output growth, fiscal deficit and the rate of inflation in Mexico for the period of the independence of Banco de México. A couple of cvar models are estimated with the aim of testing whether the government expenditure is endogenous to economic growth, in which case the fiscal deficit will not necessarily be the sole source of inflation. According to our empirical results, it is shown that there is a long-run negative relationship between government spending and inflation, without involving a Granger causality. Both models jointly reveal that the higher the economic growth rate, the larger government expenditure and the lower the rate of inflation.