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The economics of the government budget constraint

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  • Fischer, Stanley
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    Abstract

    Excessive budget deficits can lead to inflation, exchange crises, external debt crises, and high real interest rates - with implications for real exchange rate, the trade account, and investment. But the links are not automatic, for there are choices in the sources of financing - and lags in the effects of money printing and borrowing on inflation anad interest rates. Small deficits can be financed without creating excessive inflation, exchange rate crises, or an excess buildup of debt. Whether any particular path of fiscal policy is sustainable has to be checked through projections of the debt-to-GNP ratio. A given deficit is more likely to be sustainable the higher the growth rate of output. Theory and evidence both warn that large budget deficits pose real threats to macroeconomic stability and therfore to economic growth and development.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 224.

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    Date of creation: 31 May 1989
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    Handle: RePEc:wbk:wbrwps:224

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    Related research

    Keywords: Economic Theory&Research; Economic Stabilization; Banks&Banking Reform; Public Sector Economics&Finance; Environmental Economics&Policies;

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    1. Balassa, Bela, 1988. "Public finance and economic development," Policy Research Working Paper Series 31, The World Bank.
    2. Buiter, Willem H, 1988. "Some Thoughts on the Role of Fiscal Policy in Stabilization and Structural Adjustment in Developing Countries," CEPR Discussion Papers 260, C.E.P.R. Discussion Papers.
    3. Vito Tanzi, 1977. "Inflation, Lags in Collection, and the Real Value of Tax Revenue (L'inflation, les retards de recouvrement et la valeur réelle des recettes fiscales) (Inflación, desfases en la recaudación y ," IMF Staff Papers, Palgrave Macmillan, vol. 24(1), pages 154-167, March.
    4. Kiguel, Miguel A. & Liviatan, Nissan, 1988. "Inflationary rigidities and stabilization policies," Policy Research Working Paper Series 4, The World Bank.
    5. Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
    6. Easterly, William R., 1989. "Fiscal adjustment and deficit financing during the debt crisis," Policy Research Working Paper Series 138, The World Bank.
    7. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    8. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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