Deficits and Inflation; Are Monetary and Financial Institutions Worthy to Consider or Not?

Institutions are important for the analysis of the association between the deficits and inflation. This study used central bank independence and financial markets as institutional variables to investigate whether deficits are inflationary or not in the presence of dependent central bank and fragile financial markets. Panel dataset has been used for eleven Asian economies from 1981 to 2010. Empirical results suggests deficits are inflationary for Asian economies but budget deficits are particularly stronger candidates for inflationary pressure when financial markets are not fully developed and central banks are not free in followings goals and objectives under political pressure in financing the deficits.