Resumen de Fiscal dominance and financial development. The long-run Spanish case

Regina Escario Latas, María Dolores Gadea Rivas, Marcela Sabaté Sort

• Despite the theoretical agreement on the inflationary effects of persistent deficits, empirical work did not provide compelling evidence of the link between budget and money until the inclusion of non-developed countries in panel studies. This paper proposes an alternative approach: to take advantage of history and exploit the changes in development in a single country in the very long run, Spain from 1874 to 1998. As a main result, the use of different econometric tools shows how, effectively, the causality from fiscal to monetary variables changes over time. More importantly, as in previous research, the intensity of the link matches perfectly with the different degree of Spain�s institutional development, fiscal dominance holding until the easier access to foreign markets that followed its entry into the European Community in 1985.