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ECON - Research Paper Example

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Name: Lecturer: Course: Date: Introduction Budget deficit is when the anticipated expenses outweigh the anticipated revenue collection for a given financial year. This normally happens due to lack of proper budgeting process, occurrence of some unplanned (unforeseen) happenings among others…
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Download file to see previous pages Hypothetically, the relationship is that with a budget deficit, there is likelihood that the government may finance this deficit through printing of more money and pumping it into the economy. This leads to more money into the economy leading to inflation. Since this printing of money is not going concordant with production of goods and services. This concept is popular with developing countries where financial markets are not well developed to finance the deficit or when the public lacks enough confidence in the government of the day to invest in the government’s debt, or when the central bank is not independent and therefore easily manipulated by the government to finance its debts. Data pointing on the relationship between budget deficit and inflation are hard to come by since different countries give varying statistics. Some show a direct relationship while some do not hence this research. This research will use the statistics of the United States budget deficit and inflation and United Kingdom deficit and inflation. UK and US financials The united kingdom and the united states are considered to be relatively economically stable countries with independent central banks and relatively stable financial markets. This means the central bank is under no influence by the political class and financial markets may be used to finance budget deficits. This leaves the budget deficit and inflation as independent entities and it would therefore be interesting to see what other relationship there may be between the two concepts. Financial data of these two countries will be used in this paper. Budget Deficit or Surplus Data US Surplus or Deficit data The above graph shows the US deficit and surplus over a period of 20 years. The fluctuation over the years may indicate change in political environment and shift in policies. UK Surplus or Deficit data The above graph shows similar data over the same period of time but of the UK. The figures show huge variations between the two countries. It may seem the two are exact opposites of each other. For the rise of one over a given period, a fall of another within the same period is reflected. Inflation Data US inflation rates The inflation data chosen is of the same period of years, 1982-2012. The figures are also fluctuating over the years, this too may be due to changing monetary policies, and political era shifts. UK inflation rates The inflation figures between US and the UK are not as varied as the budget deficit figures. The figures seem to go in tandem with each other. This may be due to economic common factors that lead to such. The common factors may be global, bearing that the US and the UK control a significant portion of the world’s economy. Budget deficit/inflation figures US Budget deficit/Inflation The US budget deficit and inflation figures show a relationship between the two. A rise in one shows a rise in the other. This may indicate lack of full independence of the central bank. However, lagged the relationship may be, there is a relationship. UK budget deficit/Inflation The UK budget deficit and inflation figures show a more lagged relationship. The relationship between the two graphs is not reflective of an active relationship between the two figures. It may indicate a very independent central bank. However, it is important to consider the difference in the economic operation between the two c ...Download file to see next pages Read More
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