Regime Specific Fiscal Effects and the Conditional Role of Institutions: The Case of Mexico

Abstract

Institutional quality is a critical element in explaining the inflationary effects of fiscal deficits. Countries with strong institutions can limit the inflationary effects of fiscal deficits by implementing fiscal discipline more effectively. In contrast, in countries with weak institutional structures, deficiencies in transparency, accountability, government effectiveness, and policy consistency increase the inflationary pressures arising from fiscal imbalances. This study examines the impact of fiscal deficits on inflation in Mexico and the regime-dependent moderating role of institutional quality. To analyze the relationship dynamics that vary according to inflation regimes, a Markov Regime-Switching model was estimated using annual data for the period 2002–2022. The findings show that fiscal deficits are not directly effective on inflation under either regime. However, in the high-inflation regime, government effectiveness is statistically significant and creates a disinflationary effect. This result reveals that strong institutional structures play a critical role in reducing the inflationary effects of fiscal pressures under high-inflation conditions. In the low-inflation regime, the interaction term between fiscal deficits and government effectiveness is negative and significant. This indicates that institutional quality increases the effectiveness of fiscal discipline during periods when price pressures are limited. The findings reveal that institutional quality and regime type are critical factors in determining the inflationary effects of fiscal deficits. They also emphasize the importance of sustaining institutional reforms in countries aiming at price stability. In this context, the case of Mexico has shown that inflation regimes and institutional factors cannot be overlooked in evaluating the inflationary effects of fiscal deficits.

Keywords

• Inflation
• fiscal deficit
• institutional quality
• Markov Regime-Switching model
• Mexico

Rejime Özgü Mali Etkiler ve Kurumların Koşula Bağlı Rolü: Meksika Örneği

Abstract

Kurumsal kalite, mali açıkların enflasyonist etkilerini açıklamada kritik bir unsurdur. Güçlü kurumlara sahip ülkeler, mali disiplini daha etkin bir şekilde uygulayarak mali açıkların enflasyonist etkilerini sınırlayabilmektedir. Buna karşılık, zayıf kurumsal yapılara sahip ülkelerde şeffaflık, hesap verebilirlik, hükümet etkinliği ve politika tutarlılığı alanlarındaki eksiklikler, mali dengesizliklerden kaynaklanan enflasyonist baskıları artırmaktadır. Bu çalışma, Meksika’da mali açıkların enflasyon üzerindeki etkisini ve kurumsal kalitenin rejime bağlı düzenleyici rolünü incelemektedir. Enflasyon rejimlerine göre değişen ilişki dinamiklerini analiz etmek için 2002–2022 dönemine ait yıllık veriler kullanılarak Markov Rejim-Değiştirme modeli tahmin edilmiştir. Bulgular, mali açıkların her iki rejimde de enflasyon üzerinde doğrudan etkili olmadığını göstermektedir. Ancak, yüksek enflasyon rejiminde hükümet etkinliği istatistiksel olarak anlamlıdır ve dezenflasyonist bir etki yaratmaktadır. Bu sonuç, güçlü kurumsal yapıların yüksek enflasyon koşullarında mali baskıların enflasyonist etkilerini azaltmada kritik bir rol oynadığını ortaya koymaktadır. Düşük enflasyon rejiminde ise mali açık ile hükümet etkinliği arasındaki etkileşim terimi negatif ve anlamlıdır. Bu durum, fiyat baskılarının sınırlı olduğu dönemlerde kurumsal kalitenin mali disiplinin etkinliğini artırdığını göstermektedir. Elde edilen bulgular, kurumsal kalite ve rejim türünün, mali açıkların enflasyonist etkilerinin belirlenmesinde kritik unsurlar olduğunu ortaya koymaktadır. Ayrıca fiyat istikrarını hedefleyen ülkelerde kurumsal reformları sürdürmenin önemini vurgulamaktadır. Bu çerçevede, Meksika örneği mali açıkların enflasyonist etkilerinin değerlendirilmesinde enflasyon rejimi ve kurumsal faktörlerin göz ardı edilemeyeceğini göstermektedir.

Keywords

• Enflasyon
• mali açık
• kurumsal kalite
• Markov Rejim Değiştirme modeli
• Meksika

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