Fiscal and Monetary Determinants of Inflation in Low-Income Countries: Theory and Evidence from Sub-Saharan Africa

This paper presents a model of fiscal dominance with borrowing constraints and provides new evidence for a large number of Sub-Saharan African countries on the relative importance of fiscal and monetary determinants of inflation. Based on different empirical tests, results show that half of the twenty-two SSA countries were characterised in 1980–2005 by lack of clear anti-inflationary monetary and fiscal policies. The other half of the sample was characterised by either a fiscal-dominant regime, with weak or no response of primary surpluses to public debt, or by consistent adoption of a monetary-dominant regime.