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Can Public Spending Cuts be Inflationary?

  • Willem H. Buiter

The paper uses a demand for seigniorage revenue and supply of seigniorage revenue approach to determine the consequences 0 cots in public spending for the rate of inflation. Monetary financing is viewed as the residual financing mode, with tax rates and pubic debt-GDP ratios held constant. In a small open economy with an exogenous real interest rate, cuts n public consumption spending will lower the inflation rate n the revenue-efficient region of the seigniorage Laffer curve. When there are cuts in public sector capital formation , the inflation rate ran rise even in the seigniorage-efficient region. This sill be the case if the expenditure effect which reduces the deficit one-for-one) is more than offset by direct and indirect revenue effects (which raise the deficit) and by an adverse money demand effect. When the real interest rate is endogenous, the scope for inflation-increasing public spending cuts is enhanced.

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File URL: http://www.nber.org/papers/w2528.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2528.

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Date of creation: Feb 1988
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Publication status: published as "Can Public Spending Cuts be Inflationary?" from Principles of Budgeting and Financial Policy, ed. by Willem H. Buiter, Brighton, Sussex U.K.: Wheatsheaf Books, Ltd., 1989.
Handle: RePEc:nbr:nberwo:2528
Note: ME
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  1. Buiter, Willem H., 1986. "Fiscal Prerequisites for a Viable Managed Exchange Rate Regime: A Non-Technical Eclectic Introduction," CEPR Discussion Papers 129, C.E.P.R. Discussion Papers.
  2. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  3. Alan S. Blinder, 1985. "Credit Rationing and Effective Supply Failures," NBER Working Papers 1619, National Bureau of Economic Research, Inc.
  4. Buiter, Willem H., 1986. "Structural and Stabilization Aspects of Fiscal and Financial Policy in the Dependent Economy," CEPR Discussion Papers 128, C.E.P.R. Discussion Papers.
  5. Willem H. Buiter, 1984. "Saddlepoint Problems in Contifuous Time Rational Expectations Models: A General Method and Some Macroeconomic Ehamples," NBER Technical Working Papers 0020, National Bureau of Economic Research, Inc.
  6. Feltenstein, Andrew & Morris, Stephen, 1988. "Fiscal stabilization and exchange rate instability," Policy Research Working Paper Series 74, The World Bank.
  7. Buiter, Willem H, 1988. "Death, Birth, Productivity Growth and Debt Neutrality," Economic Journal, Royal Economic Society, vol. 98(391), pages 279-93, June.
  8. Willem H. Buiter, 1986. "Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks," NBER Working Papers 1844, National Bureau of Economic Research, Inc.
  9. Buiter, Willem H., 1977. "`Crowding out' and the effectiveness of fiscal policy," Journal of Public Economics, Elsevier, vol. 7(3), pages 309-328, June.
  10. Maurice Obstfeld, 1984. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
  11. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  12. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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