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The economics of the government budget constraint

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  • Fischer, Stanley

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.

Suggested Citation

  • Fischer, Stanley, 1989. "The economics of the government budget constraint," Policy Research Working Paper Series 224, The World Bank.
    • Handle: RePEc:wbk:wbrwps:224
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    References listed on IDEAS

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    Cited by:

    1. Jacek Kochanowicz & Piotr Kozarzewski & Richard Woodward, 2005. "Understanding Reform: The Case of Poland," CASE Network Reports 0059, CASE-Center for Social and Economic Research.
    2. Przemyslaw Wlodarczyk, 2017. "Fiscal sustainability of the Visegrad Group countries in the aftermath of global economic crisis," Lodz Economics Working Papers 2/2017, University of Lodz, Faculty of Economics and Sociology.
    3. Aviral Kumar Tiwari & A. P. Tiwari, 2011. "Fiscal Deficit and Inflation: An empirical analysis for India," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 14(42), pages 131-158, December.

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