Inflation and the size of government

Abstract

It is commonly supposed in public and academic discourse that inflation and big government are related. The authors show that economic theory delivers such a prediction only in special cases. As an empirical matter, inflation is significantly positively related to the size of government mainly when periods of war and peace are compared. The authors find a weak positive peacetime timeseries correlation between inflation and the size of government and a negative cross-country correlation of inflation with non-defense spending. (JEL E52, E61, E63) © 2008, The Federal Reserve Bank of St. Louis.