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The Sustainability of Budget Deficits in an Inflationary Economy

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  • Harashima, Taiji

Abstract

This paper examines fiscal sustainability in an inflationary environment, particularly the interrelation between government debt and inflation. A model that explicitly incorporates the political utility/objective function of government is constructed. The government’s borrowing behavior and inflation are determined through the simultaneous optimization of government and households. The sustainable fiscal debt in an inflationary environment was found to equal the present value of primary balances discounted by the time preference rate of government, not by the interest rate. This result raises the question of whether it is appropriate to apply the fiscal sustainability test of Hamilton and Flavin to high inflation countries.

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File URL: http://mpra.ub.uni-muenchen.de/1088/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 905.

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Date of creation: 27 Nov 2006
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Handle: RePEc:pra:mprapa:905

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Related research

Keywords: Fiscal sustainability; Inflation; The present-value of primary balances; The fiscal theory of the price level; Leviathan;

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Citations

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Cited by:
  1. Harashima, Taiji, 2007. "Hyperinflation, disinflation, deflation, etc.: A unified and micro-founded explanation for inflation," MPRA Paper 3836, University Library of Munich, Germany.
  2. Harashima, Taiji, 2007. "Why should central banks be independent?," MPRA Paper 1838, University Library of Munich, Germany, revised 19 Feb 2007.
  3. Harashima, Taiji, 2011. "A Mechanism of Inflation Differentials and Current Account Imbalances in the Euro Area," MPRA Paper 28121, University Library of Munich, Germany.
  4. Harashima, Taiji, 2008. "A Microfounded Mechanism of Observed Substantial Inflation Persistence," MPRA Paper 10668, University Library of Munich, Germany.
  5. Harashima, Taiji, 2007. "The Optimal Quantity of Money Consistent with Positive Nominal Interest Rates," MPRA Paper 1839, University Library of Munich, Germany, revised 19 Feb 2007.

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