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INTERACTION BETWEEN INFLATION AND FISCAL DEFICIT IN REPUBLIC OF MACEDONIA
Abstract
The relation between fiscal deficit, growth of the amount of money, government expenditure and inflation, has taken an important place in the literature of monetary economy. This research will analyse the connection between the fiscal deficit and inflation in the Republic of Macedonia. The main objective of this research is to review the factors responsible for the growth of fiscal deficit in Macedonia, taking into consideration all the factors which may influence in the status of fiscal deficit. The research states that inflation is not caused only by fiscal deficit. However, government expenditures and the money supply are stated as important determiners of the growth of the fiscal deficit. A question is posed in relation to what fiscal deficit is? The fiscal deficit is the difference between total government expenditures (excluding loans). The element sof the fiscal deficit are: a) income deficit and b) capital expenditures. The fiscal deficit in Macedonia in 2011 was 2.6% of GDP, whereas the expenditures were reduced in accordance with the lack of the income fullfilling the objective of the government deficit. The incomes were grown to 3.5% in comparison with 2010, under 12.6% taken in the budget. The lack was mainly because of over-optimistic estimations of non-tax income. Inflation is generally connected with the fast monetary spreading. Although the immediate cause of inflation is connected with money supply, developments in the monetary position are indicators of other sectors of economy.In order to verify our posed hypothesis above, we will use the “log log” model. Through the chosen model we will try to verify the way of interaction of our variables. We will see whether inflation influences the fiscal deficit and how does their connection stands, we will analyse whether monetary supply has positive or negative connection with the fiscal deficit, that is whether does it cause its growth or reduction, and lastly we will analyse the same for the government expenditures, i. e. whether they increase or decrease the fiscal deficit.
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