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Analysing the Sustainability of Fiscal Deficits in Developing Countries

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Author Info
John T. Cuddington (Georgetown University)
Abstract

This paper surveys the recent literature analysing fiscal deficit sustainability, most of which focuses on the U.S. and other industrial countries, in an attempt to assess its potential usefulness in the developing country context. Both the accounting approach and the present value constraint (PVC) approach are considered. Typically, sustainability analyses for developing countries involve issues that are not particularly important in the industrial country context. Reliance on seigniorage to finance deficits is often quantitatively much more important, although its use varies widely across LDCs. The distinction between domestic and foreign-currency borrowing is central; concessional lending and grants may also make an important contribution to fiscal finance. We consider generalizations of the PVC approach to situations where money-financing of deficits is used and concessional financing is available. The simultaneous presence of domestic and foreign debt, which characterizes a growing number of LDCs, are also discussed.

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Paper provided by EconWPA in its series International Finance with number 9706001.

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Length: 46 pages
Date of creation: 04 Jun 1997
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Handle: RePEc:wpa:wuwpif:9706001

Note: Type of Document - WordPerfect; prepared on IBM PC ; to print on HP Laserjet; pages: 46 ; figures: included. written with the assistance of Shihua Lu, PhD candidate at Georgetown.
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Related research
Keywords: F34 (International Lending and Debt Problems); E62 (Fiscal Policy) O23 (Fiscal and Monetary Policy in Development) O011 (Macroeconomic Analyses of Economic Development);

Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

References listed on IDEAS
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    Other versions:
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    Other versions:
  5. Nielsen, Soren Bo, 1992. "A note on the sustainability of primary budget deficits," Journal of Macroeconomics, Elsevier, vol. 14(4), pages 745-754. [Downloadable!] (restricted)
  6. Ahmed, Shaghil & Rogers, John H., 1995. "Government budget deficits and trade deficits Are present value constraints satisfied in long-term data?," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 351-374, November. [Downloadable!] (restricted)
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  7. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Willem H. Buiter & Kenneth M. Kletzer, 1992. "Government Solvency, Ponzi Finance and the Redundancy and Usefulness of Public Debt," NBER Working Papers 4076, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. James D. Hamilton & Marjorie A. Flavin, 1985. "On the Limitations of Government Borrowing: A Framework for Empirical Testing," NBER Working Papers 1632, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    Other versions:
  16. Home, Jocelyn, 1991. "Criteria of external sustainability," European Economic Review, Elsevier, vol. 35(8), pages 1559-1574, December. [Downloadable!] (restricted)
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    Other versions:
  18. Corsetti, G., 1990. "Testing For Solvency Of Public Sector: An Application To Italy," Papers 617, Yale - Economic Growth Center.
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    Other versions:
  20. Tanner, Evan & Liu, Peter, 1994. "Is the Budget Deficit "Too Large"?: Some Further Evidence," Economic Inquiry, Oxford University Press, vol. 32(3), pages 511-18, July.
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    Other versions:
  22. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October. [Downloadable!] (restricted)
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  23. O'Connell, Stephen A & Zeldes, Stephen P, 1988. "Rational Ponzi Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-50, August. [Downloadable!] (restricted)
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  24. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December. [Downloadable!] (restricted)
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  25. Rudin, J.R. & Smith, G.W., 1991. "Deficit Sustainability: A Simple Test," UBC Departmental Archives 91-25, UBC Department of Economics.
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  27. Ghosh, Atish R, 1995. "Intertemporal Tax-Smoothing and the Government Budget Surplus: Canada and the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1033-45, November. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Antonio Afonso, 2004. "Fiscal Sustainability: the Unpleasant European Case," Money Macro and Finance (MMF) Research Group Conference 2004 57, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  2. Presbitero, Andrea F. & Arnone, Marco, 2006. "External debt sustainability and domestic debt in Heavily Indebted Poor Countries," MPRA Paper 1396, University Library of Munich, Germany. [Downloadable!]
  3. Marco Arnone & Luca Bandiera & Andrea Presbitero, 2005. "External Debt Sustainability: Theory and Empirical Evidence," International Finance 0512007, EconWPA. [Downloadable!]
  4. Babacar XSENE, 2005. "Impact du fardeau virtuel de la dette sur le taux de change réel d'équilibre des pays en développement," Macroeconomics 0501014, EconWPA. [Downloadable!]
  5. António Afonso, 2000. "Fiscal policy sustainability: some unpleasant European evidence," Working Papers 2000/12, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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