Exploring the Effect of Government Debt on Inflation in Developing Economies: Does Monetary and Fiscal Policies Matter

Abstract

With particular emphasis on the mediating functions of monetary and fiscal policy, this thesis explores the intricate interaction between sovereign debt and price increases in developing countries. Rising public debt is now a constant problem in many developing countries, usually paralleling inflationary pressures endangering macroeconomic stability. This paper examines how changes in government debt affect inflation dynamics by using panel data from a number of developing nations over the last two decades. It also investigates whether the attitude and cooperation of fiscal and monetary policy frameworks moderates or amplifies these impacts. The study isolates the influence of building up debt on inflation using econometric modeling methods such dynamic panel regressions and fixed effects. Moreover, the paper investigates the influence of the debt-inflation link under confidence in policy, financial independence, and fiscal discipline. The results show that although government debt has a major influence on inflation, the degree and type of this link are very dependent on the efficacy of institutional policy reactions. In nations with good monetary policies and responsible fiscal management, the price effects of debt are greatly lessened. This work adds to the continuous discussion on beneficial financial management and price control in developing nations. It provides practical ideas for politicians trying to strike a balance between debt sustainability, growth, and price equilibrium in the face of local and worldwide economic concerns.