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The Economic of the Government Budget Constraint

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  • Fischer, Stanley
  • Easterly, William

Abstract

This article summarizes the simple analytics of the macroeconomic effects of government budget deficits. The presentation is organized around three key relationships: the national income accounts budget deficit identity, the deficit financing identity, and the dyamic equation for the evolution of the ratio of public debt to gross national product. The national income accounts identity highlights the effect of the deficit on domestic saving and investment and the current account. Examining the financing of the deficit brings to light the different kinds of macroeconomic imbalance of the deficit can cause--as a first approximation, printing money excessively shows up as inflation, excessive use of foreign reserves leads to crises in the balance of payments, high foreign borrowing leads to a debt crisis, and too much domestic borrowing leads to high real interest rates and crowding out to private investment. The debt dynamics equation is used to show the long-run constraints on fiscal policy. Copyright 1990 by Oxford University Press.

Suggested Citation

  • Fischer, Stanley & Easterly, William, 1990. "The Economic of the Government Budget Constraint," World Bank Research Observer, World Bank Group, vol. 5(2), pages 127-142, July.
  • Handle: RePEc:oup:wbrobs:v:5:y:1990:i:2:p:127-42
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