Fiscal Policy and Inflation Dynamics in Developing Countries

Abstract

Fiscal policy remains a crucial tool for macroeconomic stabilization in developing economies where inflation often arises from structural imbalances, supply-side constraints, and fiscal mismanagement. This paper examines how fiscal deficits, public debt, and government spending patterns affect inflationary pressures in developing countries, with a specific focus on Pakistan and South Asian economies. It further explores the interaction between fiscal policy, monetary responses, and external shocks such as exchange rate volatility. Using empirical evidence from the International Monetary Fund (IMF) and World Bank data (2010–2024), this study emphasizes the significance of fiscal discipline and expenditure efficiency in controlling inflation and sustaining economic growth. The paper concludes that well-coordinated fiscal and monetary policies are vital to achieving macroeconomic stability in developing contexts.