The economics of the government budget constraint
Excessive budget deficits can lead to inflation, exchange crises, external debt crises, and high real interest rates - with implications for real exchange rate, the trade account, and investment. But the links are not automatic, for there are choices in the sources of financing - and lags in the effects of money printing and borrowing on inflation anad interest rates. Small deficits can be financed without creating excessive inflation, exchange rate crises, or an excess buildup of debt. Whether any particular path of fiscal policy is sustainable has to be checked through projections of the debt-to-GNP ratio. A given deficit is more likely to be sustainable the higher the growth rate of output. Theory and evidence both warn that large budget deficits pose real threats to macroeconomic stability and therfore to economic growth and development.
|Date of creation:||31 May 1989|
|Date of revision:|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
- Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
- L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
- Buiter, Willem H., 1988.
"Some Thoughts on the Role of Fiscal Policy in Stabilization and Structural Adjustment in Developing Countries,"
CEPR Discussion Papers
260, C.E.P.R. Discussion Papers.
- Willem H. Buiter, 1988. "Some Thoughts on the Role of Fiscal Policy in Stabilisation and Structural Adjustment in Developing Countries," NBER Working Papers 2603, National Bureau of Economic Research, Inc.
- Buiter, W.H., 1988. "Some Thoughts On The Role Of Fiscal Policy In Stabilisation And Structural Adjustment In Developing Countries," Papers 312, London School of Economics - Centre for Labour Economics.
- Kiguel, Miguel A. & Liviatan, Nissan, 1988. "Inflationary rigidities and stabilization policies," Policy Research Working Paper Series 4, The World Bank.
- Vito Tanzi, 1977. "Inflation, Lags in Collection, and the Real Value of Tax Revenue (L'inflation, les retards de recouvrement et la valeur rÃ©elle des recettes fiscales) (InflaciÃ³n, desfases en la recaudaciÃ³n y valor ," IMF Staff Papers, Palgrave Macmillan, vol. 24(1), pages 154-167, March.
- Balassa, Bela, 1988. "Public finance and economic development," Policy Research Working Paper Series 31, The World Bank.
- Easterly, William R., 1989. "Fiscal adjustment and deficit financing during the debt crisis," Policy Research Working Paper Series 138, The World Bank.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:224. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.