Impact of Government Spending On Inflation In Asian Emerging Economies: Evidence From India, China, And Indonesia

Abstract

This paper investigates the long-run and short-run impacts of government spending on inflation in three Asian emerging economies of India, China and Indonesia by applying the cointegration and Vector Error Correction Model to time series data from 1970 to 2010. The results confirm a cointegrating causal link between government spending and inflation in the long run in these countries, regardless of their institutional governance differences. In the short run, government spending (as a percentage of GDP) appears to have a negative impact on inflation in China, while a positive impact in Indonesia and India. The implication is that governments of emerging economies should be prudent with their decisions on government spending.