Role of Fiscal Policy in the Recent Inflation Shock in the Czech Republic
| Thesis title in Czech: | Vliv fiskální politiky na nedávný inflační šok v České republice |
|---|---|
| Thesis title in English: | Role of Fiscal Policy in the Recent Inflation Shock in the Czech Republic |
| Key words: | inflace, fiskální politika, Česká republika, COVID-19, panelová studie |
| English key words: | inflation, fiscal policy, Czech Republic, COVID-19, panel regression |
| Academic year of topic announcement: | 2022/2023 |
| Thesis type: | Bachelor's thesis |
| Thesis language: | angličtina |
| Department: | Institute of Economic Studies (23-IES) |
| Supervisor: | PhDr. Jaromír Baxa, Ph.D. |
| Author: | hidden - assigned by the advisor |
| Date of registration: | 27.06.2023 |
| Date of assignment: | 27.06.2023 |
| Date and time of defence: | 10.06.2024 00:00 |
| Venue of defence: | IES |
| Date of electronic submission: | 29.04.2024 |
| Guidelines |
| Research question and motivation
With the outbreak of pandemics of covid-19 in the spring of 2020, nearly all European countries decided to implement various measures with aim to decelerate spread of the virus which claimed numerous financial resources in response. The subsidies for restricted businesses, backing up the health services, developing and purchasing vaccines, etc. caused a significant deterioration in public finances, adding to pre-existing strains from long-term structural challenges. Various governments hence implemented several fiscal measures that together with covid-related expenditures led in many countries to extraordinarily high public deficits (OECD, 2021), which in some states, including the Czech Republic, persisted even in the following post-pandemic years. Shortly after the commencement of enormous fiscal stimulation of economy, a rising inflation emerged across Europe. Although the standard economic theory based on monetarist view states that inflation is solely a monetary phenomenon, the unevenness of inflation rate across the European Union and even the eurozone might suggest that there is a role of fiscal policy as well since governmental steps slightly differed and while some countries experienced only a moderate increase in inflation compared to previous years, it rose substantially in Baltics or the Visegrád Group. A potential role of fiscal policy in boosting inflation is even proposed by the fiscal theory of the price level popularized by renown scholars such as J. H. Cochrane. In the wake of the above-mentioned, the aim of the thesis will be to examine a relationship between expansive fiscal policy undertaken in the Czech Republic in years 2020 to 2022 and inflation shock there in a situation when both the Czech National Bank and the government blame each other of mismanagement leading to the Czech Republic experiencing one of the highest rise in price level across the EU. The most significant fiscal steps in the given years will be discussed and split based on whether they are directly linked to handling the pandemics or not. Afterwards, a cumulative impact on rise in inflation of increased public expenditures and then decreased taxation will be assessed to reveal an answer for a question whether fiscal policies implemented in the given years, and thus reckless behaviour of the Czech government, contributed positively to current inflation shock in the Czech Republic and to which extent. |
| References |
| Čaklovica,L. & Efendic,A. (2020). Determinants of Inflation in Europe – A Dynamic Panel Analysis. Financial Internet Quarterly,16(3) 51-79. https://doi.org/10.2478/fiqf-2020-0018
Olaoye, O. O., Omokanmi, O. J., Tabash, M. I., Olofinlade, S. O., & Ojelade, M. O. (2023). Soaring inflation in sub-Saharan Africa: A fiscal root?. Quality & Quantity, 1–23. Advance online publication. https://doi.org/10.1007/s11135-023-01682-z Deniz, P., Tekce, M., Yilmaz, A. (2016). Investigating the Determinants of Inflation: A Panel Data Analysis. International Journal of Financial Research, 7(2), 233-46. http://dx.doi.org/10.5430/ijfr.v7n2p233 Aisen, A.,Veiga, F.J. (2006). Does Political Instability Lead to Higher and More Volatile Inflation? A Panel Data Analysis. Journal of Money, Credit and Banking, The Ohio State University, 38(5), 1379-89. http://dx.doi.org/10.1353/mcb.2006.0064 Jordà, Ó., Liu, C., Nechio, F., Rivera-Reyes, F. (2022). Why Is U.S. Inflation Higher than in Other Countries?. FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2022(07). [online]. https://www.frbsf.org/economic-research/publications/economic-letter/2022/march/why-is-us-inflation-higher-than-in-other-countries/ Barnichon, R., Oliveira, L. E., Shapiro, A. H. (2021). Is the American Rescue Plan Taking Us Back to the ’60s?. FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2021(27). [online]. https://www.frbsf.org/economic-research/publications/economic-letter/2021/october/is-american-rescue-plan-taking-us-back-to-1960s/ Národní kontrolní úřad (2022). Výroční zpráva o činnosti NKÚ za rok 2021, Národní kontrolní úřad. https://www.nku.cz/assets/publikace-a-dokumenty/vyrocni-zprava/vyrocni-zprava-nku-2021.pdf (accessed on June 3, 2023) |
| Preliminary scope of work |
| Contribution
Up to now, various papers aimed to analyse steps of the Czech government during pandemic years and illuminate which proportion of increased spending was directly linked to mitigating negative impacts of pandemics and which was not. Those chiefly include annual reports of the Supreme Audit Office for years 2020 and 2021 which revealed that roughly around 90% of the increase in public expenditures in 2021 compared to the previous year was not related to expenditures due to covid-19 pandemics (NKÚ, 2022). However, only little of the papers tried to link the hike in governmental expenditures to the current inflation shock in the Czech Republic. Hence, I will try to expand on previous analyses of fiscal steps undertaken by the government by assessing to which extent the sudden rise in inflation can be explained by increased governmental spendings. Several similar studies have already been carried out, for instance Barnichon et al. (2021), Jordà et al. (2022), or Olaoye et al. (2023), but I am not aware of any being from the environment of Czechia. Only general analyses of origins of current inflation shock have typically been made. The results of my thesis should suggest how much is the government to blame for the current inflation shock in the Czech Republic and thus offer a ruling in a dispute between the central bank and the government. It might also reveal an influence of fiscal policy on inflation rate in the environment of the Czech Republic which might be helpful for governmental bodies when assessing potential impact of proposed policies on inflation. Methodology In the thesis, datasets produced by the European Statistical Office (Eurostat) will be primarily used with combination of those published by the World Bank, the International Monetary Fund, and the OECD. Out of them, a panel dataset comprising of numerous European countries, in particular members of the EU, will be created for further analysis. Beside the initial discussion of the situation with inflation across the European Union, of its potential roots proposed by previous papers, and analysis of the most significant fiscal steps of the Czech government in the given years, the main effort will be placed upon development of a dynamic panel regression model inspired by those proposed by Čaklovica and Efendic (2020), Olaoye et al. (2023), and Deniz et al. (2016). On a panel of European countries, effects on inflation of various variables will be assessed. It is planned to use those tracing primarily an influence of fiscal policy with an intention to include dummy variables to reveal possible country-specific and time-specific effects of standard factors. Nevertheless, influence of various other variables on inflation will be examined, especially the impact of business cycle, monetary policy, and supply or external factors with possibility to include even variables detecting role of instability, institutions, and credibility of monetary authority as in Aisen and Veiga (2006) or Čaklovica and Efendic (2020). After specifying the model, cumulative impact of fiscal steps will be assessed to answer the research question. |
| Preliminary scope of work in English |
| Outline
1. Introduction and motivation 2. Literature review and contribution 3. Overview of fiscal and macroeconomic situation a. Soaring inflation in Europe and in the Czech Republic – possible roots and country comparison b. Macroeconomic situation in the Czech Republic c. Response of the Czech government on the pandemic of covid-19 d. Summary of the most significant fiscal steps in the Czech Republic in the given years 4. Model construction a. Description of the data b. Construction of the panel model 5. Results a. Assessing effect of fiscal policy on inflation and analysis of the results b. Discussion of other pro-inflationary pressures c. Assessing impact of selected policies d. Answering the research question 6. Conclusion a. Broader interpretation of the results b. Implications for practice |