Budget Deficits: A Major Cause of Inflation?

Abstract

This paper examines the proposition that budget deficits are a major cause of inflation. Economic theory does not unconditionally support the proposition, and available empirical evidence does not support the proposition. During periods of expansion, 1949–1973, the increases in the money supply that can be directly traced to budget deficits are often a contributing but not necessarily a major cause of inflations. On the other hand, the fiscal effects of the budget, because of the automatic growth in federal receipts, are usually checking the growth in both prices and real output. Based on the discussion and data presented in this paper, the deficit hypothesis cannot be accepted. Inflations are too complicated phenomena to be explained by a single variable such as budget deficits.