Budget Deficit Spending Causes Inflation

Authors

Roberto B. Raymundo, De La Salle University, ManilaFollow
Paulynne J. Castillo, De La Salle University, Manila, Philippines

JEL Classification System

E31

Abstract

Using the Cochrane-Orcutt iterative procedure, the paper provides strong statistical evidence that inflation is a monetary phenomenon caused by budget deficit spending when the central bank buys government debt. Regression results validate that increasing budget deficits lead to the issuance of more debt securities the central bank uses to back the creation of new money. The central bank purchases government securities from commercial banks to implement expansionary monetary policy. The increase in money supply is not possible without the issuance of government debt securities, which, in turn, is only undertaken by the Bureau of Treasury when it finances budget deficits. Budget deficit spending and its funding by the central bank using fiat money creation, therefore, is the primary cause of inflation. Hence, inflation is an implicit tax, as it is the burden transferred by the national government to all individuals in the economy when it finances its budget deficits by selling government securities to the central bank. This additional burden is over and above the increasing explicit direct and indirect taxation imposed by the government over several decades.

Recommended Citation

Raymundo, Roberto B. and Castillo, Paulynne J. (2025) "Budget Deficit Spending Causes Inflation," DLSU Business & Economics Review: Vol. 35: No. 1, Article 9.
DOI: https://doi.org/10.59588/2243-786X.1059
Available at: https://animorepository.dlsu.edu.ph/ber/vol35/iss1/9