On deficit financing

Abstract

The main conclusion emerging from the analysis is that the inflationary impact of a budget deficit depends upon the method used to finance that deficit. Using a static and a dynamic macroeconomic model it has been shown that the proportion of budget deficit financed by money creation is a crucial determinant of the rate of price inflation. The price inflaction will be greater, the higher the proportion of budget/ financed by money creation deficit conditions under which this conclusion holds have derived. a crude empirical test is provided.