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The Economic of the Government Budget Constraint

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  • Fischer, Stanley
  • Easterly, William

Abstract

This article summarizes the simple analytics of the macroeconomic effects of government budget deficits. The presentation is organized around three key relationships: the national income accounts budget deficit identity, the deficit financing identity, and the dyamic equation for the evolution of the ratio of public debt to gross national product. The national income accounts identity highlights the effect of the deficit on domestic saving and investment and the current account. Examining the financing of the deficit brings to light the different kinds of macroeconomic imbalance of the deficit can cause--as a first approximation, printing money excessively shows up as inflation, excessive use of foreign reserves leads to crises in the balance of payments, high foreign borrowing leads to a debt crisis, and too much domestic borrowing leads to high real interest rates and crowding out to private investment. The debt dynamics equation is used to show the long-run constraints on fiscal policy. Copyright 1990 by Oxford University Press.

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Bibliographic Info

Article provided by World Bank Group in its journal World Bank Research Observer.

Volume (Year): 5 (1990)
Issue (Month): 2 (July)
Pages: 127-42

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Handle: RePEc:oup:wbrobs:v:5:y:1990:i:2:p:127-42

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Cited by:
  1. Afonso S. Bevilaqua, 1995. "Dual resource transfers and interruptions in external debt service," Textos para discussão 346, Department of Economics PUC-Rio (Brazil).
  2. Alvaro Montenegro, 2004. "Lectura de la estadística fiscal," DOCUMENTOS DE ECONOMÍA 003137, UNIVERSIDAD JAVERIANA - BOGOTÁ.
  3. Luis Ignacio Lozano E., 2001. "COLOMBIA'S PUBLIC FINANCE IN THE 1990s: A DECADE OF REFORMS, FISCAL IMBALANCE, AND DEBT," BORRADORES DE ECONOMIA 002140, BANCO DE LA REPÚBLICA.
  4. J. Paul Dunne & Sam Perlo-Freeman & Aylin Soydan, 2004. "Military expenditure and debt in South America," Defence and Peace Economics, Taylor and Francis Journals, vol. 15(2), pages 173-187.
  5. Hong-Ghi Min, 2002. "Inequality, the price of nontradables, and the real exchange rate : theory and cross-country evidence," Policy Research Working Paper Series 2758, The World Bank.
  6. Ghani, Ejaz & Hyoungsoo Zang, 1995. "Is Ethiopia's debt sustainable?," Policy Research Working Paper Series 1525, The World Bank.
  7. Thorne, Alfredo E. & Dastgheib, Azita, 1992. "Public sector debt, fiscal deficits, and economic adjustment : a comparative study of six EMENA countries," Policy Research Working Paper Series 840, The World Bank.
  8. Agbonyitor, Albert D. K., 1998. "Development expenditures and the local financing constraint," Policy Research Working Paper Series 1907, The World Bank.
  9. Aline Coudouel & Stefano Paternostro, 2006. "Analyzing the Distributional Impact of Reforms : A Practitioner’s Guide to Pension, Health, Labor Markets, Public Sector Downsizing, Taxation, Decentralization, and Macroeconomic Modeling, Volume 2," World Bank Publications, The World Bank, number 7041.
  10. Paul Dunne & Sam Perlo-Freeman & Aylin Soydan, 2004. "Military expenditure and debt in small industrialised economies: A panel analysis," Defence and Peace Economics, Taylor and Francis Journals, vol. 15(2), pages 125-132.
  11. Easterly, william, 2001. "Growth implosions, debt explosions, and my Aunt Marilyn : do growth slowdowns cause public debt crises?," Policy Research Working Paper Series 2531, The World Bank.
  12. Jakob Christensen, 2004. "Domestic Debt Markets in Sub-Saharan Africa," IMF Working Papers 04/46, International Monetary Fund.

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