John Hooley and Mika Saito from the International Monetary Fund, on 22 January 2025, presented their article on fiscal dominance and inflation published in Public Sector Economics. Central bank financing of government returned to the fore of the policy debate during the Covid-19 crisis as many countries faced additional budgetary pressures at a time when debt levels were already high. Sub-Saharan Africa provided valuable insights into this issue since it is a region where government financing by central banks was common even before the Covid-19 crisis.

The paper finds that fiscal dominance is stronger during periods of pressure on public finances, particularly when alternative financing options are limited. Central bank financing of government has an inflationary impact through the exchange rate channel. To mitigate the risks, numerical legal limits on central bank financing can be effective, even if they are not always binding.

These findings suggest that fiscal dominance is a relevant macroeconomic issue that policymakers should take seriously at regular times and not just from the perspective of hyperinflation risk.

The presentation was moderated by Dubravko Mihaljek, co-editor of the Public Sector Economics journal.

A presentation of this interesting lecture is also available.