Fiscal Regime in Least Developed Countries, Institutions and Implications for Monetary Policy

Cassim, Lucius and Mallick, Debdulal (2025): Fiscal Regime in Least Developed Countries, Institutions and Implications for Monetary Policy.

Abstract

We investigate whether public debt in least developed countries (LDCs) is serviced through fiscal adjustments or by triggering inflation. Using time series data from LDCs for the 1980-2023 period and employing the Bayesian structural vector auto-regressive model, we estimate the response of public liabilities to positive surplus shocks. We find support for the latter hypothesis of the Fiscal Theory of Price Level that these countries are characterized by non-Ricardian fiscal regimes. One important implication of our findings is that the conventional monetary policy may not be effective in stabilizing inflation in these countries. In contrast, when we replicate the same exercise for developed countries, we find support for the former hypothesis. We further explore the role of institutional development in explaining the fiscal (in)discipline in LDCs.

• Item Type: MPRA Paper
• Language: English
• Keywords: Non-Ricardian fiscal regime; Fiscal theory of price level; Bayesian SVAR; Central bank; Monetary policy; Least developed countries; Institutions.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy

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