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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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  • Harashima, Taiji, 2006. "The Sustainability of Budget Deficits in an Inflationary Economy," MPRA Paper 905, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:905
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    References listed on IDEAS

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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, 2008. "A Microfounded Mechanism of Observed Substantial Inflation Persistence," MPRA Paper 10668, University Library of Munich, Germany.
    3. Harashima, Taiji, 2017. "Should a Government Fiscally Intervene in a Recession and, If So, How?," MPRA Paper 78053, University Library of Munich, Germany.
    4. Harashima, Taiji, 2011. "A Mechanism of Inflation Differentials and Current Account Imbalances in the Euro Area," MPRA Paper 28121, University Library of Munich, Germany.
    5. Harashima, Taiji, 2019. "A Theory of Inflation: The Law of Motion for Inflation under the MDC-based Procedure," MPRA Paper 113161, University Library of Munich, Germany.
    6. Harashima, Taiji, 2021. "The Root Cause of Sovereign Default," MPRA Paper 110010, University Library of Munich, Germany.
    7. 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.
    8. Harashima, Taiji, 2007. "Why should central banks be independent?," MPRA Paper 1838, University Library of Munich, Germany, revised 19 Feb 2007.
    9. Harashima, Taiji, 2018. "Why Are Inflation and Real Interest Rates So Low? A Mechanism of Low and Floating Real Interest and Inflation Rates," MPRA Paper 84311, University Library of Munich, Germany.

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    More about this item

    Keywords

    Fiscal sustainability; Inflation; The present-value of primary balances; The fiscal theory of the price level; Leviathan;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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