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The Sequencing of Deficit Reduction and Disinflation in Canada

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  • David W. Baar

Abstract

The costs of not reducing the fiscal deficit prior to monetary disinflation are examined in relation to the Canadian experience under the 1984 to 1993 Mulroney governments. Counter-historical simulations using the FOCUS model show that if the 1986 budget had implemented an aggressive deficit reduction strategy comparable to what was finally implemented in the 1995 budget, the cost of lowering inflation would have been significantly reduced and the federal debt-to-GDP ratio would have been 30 percentage points lower.

Suggested Citation

  • David W. Baar, 2002. "The Sequencing of Deficit Reduction and Disinflation in Canada," Canadian Public Policy, University of Toronto Press, vol. 28(4), pages 547-561, December.
  • Handle: RePEc:cpp:issued:v:28:y:2002:i:4:p:547-561
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    References listed on IDEAS

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    1. Barnhart, Scott W. & Darrat, Ali F., 1988. "Budget deficits, money growth and causality: Further OECD evidence," Journal of International Money and Finance, Elsevier, vol. 7(2), pages 231-242, June.
    2. Shapiro, Matthew D & Slemrod, Joel, 1995. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," American Economic Review, American Economic Association, vol. 85(1), pages 274-283, March.
    3. David A. Dodge, 1998. "Reflections on the Role of Fiscal Policy: The Doug Purvis Memorial Lecture," Canadian Public Policy, University of Toronto Press, vol. 24(3), pages 275-289, September.
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    Cited by:

    1. Matteo Luciani, 2004. "A VAR Model for the Analysis of the Effects of Monetary Policy in the Euro Area," Rivista di Politica Economica, SIPI Spa, vol. 94(6), pages 175-214, November-.
    2. Virginie Traclet, 2004. "Monetary and Fiscal Policies in Canada: Some Interesting Principles for EMU?," Staff Working Papers 04-28, Bank of Canada.

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