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Fiscal adjustment and deficit financing during the debt crisis

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  • Easterly, William R.

Abstract

To study the adjustment to the debt crisis, this paper compares the experience of seven"crisis"debtor countries with those of five"noncrisis"debtor countries. In response to a sharp reduction in external capital flows, the crisis countries rescheduled their debt during 1982-87. The noncrisis group avoided debt resheduling during that period and maintained access to external capital. The paper finds that highly indebted countries are probably better off raising conventional taxes and cutting current spending, rather than raising taxes on financial intermediation and cutting public investment. Shifting to sounder policies may require the breathing space only new external financing or debt relief would provide.

Suggested Citation

  • Easterly, William R., 1989. "Fiscal adjustment and deficit financing during the debt crisis," Policy Research Working Paper Series 138, The World Bank.
  • Handle: RePEc:wbk:wbrwps:138
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Agnello, Luca & Sousa, Ricardo M., 2015. "Can re-regulation of the financial sector strike back public debt?," Economic Modelling, Elsevier, vol. 51(C), pages 159-171.
    2. Garima Vasishtha, 2010. "Domestic versus External Borrowing and Fiscal Policy in Emerging Markets," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 1058-1074, November.
    3. Carmen M. Reinhart & Miguel Angel Santos, 2015. "From Financial Repression to External Distress: The Case of Venezuela," NBER Working Papers 21333, National Bureau of Economic Research, Inc.
    4. Giovannini, Alberto & de Melo, Martha, 1990. "Government revenue from financial repression," Policy Research Working Paper Series 533, The World Bank.
    5. Reinhart, Carmen & Kirkegaard, Jacob & Sbrancia, Belen, 2011. "Financial repression redux," MPRA Paper 31641, University Library of Munich, Germany.
    6. Guillermo A. Calvo, 1995. "Varieties of Capital-Market Crises," Research Department Publications 4008, Inter-American Development Bank, Research Department.
    7. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "A Decade of Debt," Central Banking, Analysis, and Economic Policies Book Series,in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.), Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 4, pages 97-135 Central Bank of Chile.
    8. Guillermo A. Calvo, 1995. "Variedades de crisis del mercado de capitales," Research Department Publications 4009, Inter-American Development Bank, Research Department.
    9. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    10. Manuel Ramos -Francia & Ana María Aguilar-Argaez & Santiago García-Verdú & Gabriel Cuadra-García, 2013. "Heading into Trouble: A Comparison of the Latin American Crises and the Euro Area’s Current Crisis," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 87-165, January-j.
    11. Michael Dooley & Mark R. Stone, 1993. "Endogenous Creditor Seniority and External Debt Values," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 395-413, June.
    12. Alberto Giovannini & Martha de Melo, 1991. "Government Revenue from Financial Repression," NBER Working Papers 3604, National Bureau of Economic Research, Inc.
    13. Guillermo A. Calvo, 1995. "Varieties of Capital-Market Crises," IDB Publications (Working Papers) 6292, Inter-American Development Bank.
    14. Carmen M. Reinhart & M. Belen Sbrancia1, 2015. "The liquidation of government debt," Economic Policy, CEPR;CES;MSH, vol. 30(82), pages 291-333.
    15. Montiel, Peter J., 1993. "Fiscal aspects of developing countrydebt problems and debt and debt-service reduction operations : a conceptual framework," Policy Research Working Paper Series 1073, The World Bank.
    16. Fischer, Stanley, 1989. "The economics of the government budget constraint," Policy Research Working Paper Series 224, The World Bank.
    17. Chamley, Christophe & Honohan, Patrick, 1990. "Taxation of financial intermediation : measurement principles and application to five African countries," Policy Research Working Paper Series 421, The World Bank.
    18. Atiyas, Izak, 1989. "The private sector's response to financial liberalization in Turkey : 1980-82," Policy Research Working Paper Series 147, The World Bank.
    19. Islam, Roumeen & Wetzel, Deborah L., 1991. "The macroeconomics of public sector deficits : the case of Ghana," Policy Research Working Paper Series 672, The World Bank.
    20. Chhibber, Ajay & Dailami, Mansoor, 1990. "Fiscal policy and private investment in developing countries : recent evidence on key selected issues," Policy Research Working Paper Series 559, The World Bank.

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