Does Public Spending Affect Inflation – Evidence for Bulgaria?
Does Public Spending Affect Inflation – Evidence for Bulgaria?

Author(s): Kamelia Asenova
Subject(s): Economy, National Economy, Business Economy / Management, Public Finances, Socio-Economic Research
Published by: Университет за национално и световно стопанство (УНСС)
Keywords: public spending; inflation
Summary/Abstract: In recent years, public spending on the state budget in Bulgaria has been growing at significant pace. This may lead to an excessive deficit in the future and a negative impact on the economy. This process of increasing public spending was accelerated during the unprecedented pandemic of COVID-19. Recovery measures required that this trend be continued in the following years. The reasons for the increase in the price level can be explained by: on the one hand, negative supply shocks and inflation of cost, and on the other hand, the impact of recovery instruments and the stimulation of aggregate demand and demand inflation. This case provides us with a reason to investigate the impact of increased public spending on the inflation index in Bulgaria for the period 2007-2023 and that part of the increase in the price level due to the stimulation of aggregate demand by the state and is known in theory as demand inflation. Public spending affects inflation in the short run in Bulgaria. The results also support the Keynesian view one possible channel public spending to influence inflation is through its impact on aggregate demand. In testing for long-run effects, the strongest impact is from the most distant period of today on the CPI.

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