Principles of Budgetary and Financial Policy

What principles should govern the design of governmental, budgetary and financial policy? Policymakers in the major industrial countries and officials of international organizations are deeply concerned about rising public debt burdens. But there are others who believe that only public spending on goods and services matters, while public debt and deficits are irrelevant. Principles of Budgetary and Financial Policy seeks to bridge the gap between these views, showing how rigorous economic theory can be applied to the study of fiscal, financial, and monetary policy and examining the contributions of such policy to the goals of cyclical stabilization, structural adjustment, and secular growth in modern "mixed" economies. This book brings together twelve years of Willem Buiter's work on fiscal and financial policy, including both previously published and new essays. In addition to raising the level of policy debate, it unites the two subdisciplines into which economists have split the study of fiscal and financial policy: the microeconomic theory of neoclassical public finance and the macroeconomic neoKeynesian theory of stabilization policy. The book's introductory section sets the scene through broad ranging, nontechnical papers emphasizing the unavoidable interconnection of the stabilization role of fiscal policy with its allocational and distributional roles. In the following sections Buiter focuses on the measurement of public sector activity over time, considering how (and to what extent) a longer-run perspective on the government's finances can be summarized in a single comprehensive government balance sheet. He examines "crowding out," the displacement of private economic activity by public economic activity, explaining why and how public debt and deficits matter and emphasizing the distinction between various financing issues. The fiscal origins of inflation are addressed, as well as the eventual monetization of public sector deficits. In an extensive concluding essay Buiter considers the role of fiscal policy in stabilization and structural adjustment in open developing countries.