Are budget deficits inflationary? A reconsideration of the evidence

This paper returns to the issue of whether high budget deficits have had an y inflationary consequences in Greece. In a recent paper, Hondroyiannis and Papapetrou (1997) report results denying any direct impact of the der cit on inflation. It is shown here that their evidence lacks weight owing to se veral modelling and estimation problems. Upon rectifying these problems, th e results consistently suggest that, besides money growth, budget deficits have also played a significant and direct role in the Greek inflationary pr ocess. Thus, efforts to curtail budget deficits in Greece as required by th e EMU should also prove useful in mitigating inflationary pressures.