Revisit the Budget Deficits and Inflation: Evidence from Time and Frequency Domain Analyses

The purpose of this paper is to test the relationship between budget deficits and inflation for nine EU countries during the period of 1990-2013 using the quarterly data. Recently, the public deficits and inflation have had an increasing importance for developing/emerging and developed coun-tries to build the stability macroeconomic performance in the long run. This study is the first at-tempt to determine the relationship between the inflation and budget deficits for nine EU coun-tries using different bootstrap causality tests. We employ the bootstrap causality and Granger causality test in the frequency domain analysis which allows us to distinguish short and long-run causality. We do not find a relationship between these variables when we employ bootstrap cau-sality analysis. While the frequency domain causality shows that there is no relationship causality from budget deficits to inflation for all countries, causality from inflation to budget deficits indi-cates a permanent (long-run) relationship for Belgium, and France