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The economics of the government budget constraint

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  • Fischer, Stanley

Abstract

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.

Suggested Citation

  • Fischer, Stanley, 1989. "The economics of the government budget constraint," Policy Research Working Paper Series 224, The World Bank.
  • Handle: RePEc:wbk:wbrwps:224
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    References listed on IDEAS

    as
    1. Easterly, William R., 1989. "Fiscal adjustment and deficit financing during the debt crisis," Policy Research Working Paper Series 138, The World Bank.
    2. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    3. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    4. 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.
    5. Kiguel, Miguel A. & Liviatan, Nissan, 1988. "Inflationary rigidities and stabilization policies," Policy Research Working Paper Series 4, The World Bank.
    6. Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
    7. Balassa, Bela, 1988. "Public finance and economic development," Policy Research Working Paper Series 31, The World Bank.
    8. Vito Tanzi, 1977. "Inflation, Lags in Collection, and the Real Value of Tax Revenue (L'inflation, les retards de recouvrement et la valeur réelle des recettes fiscales) (Inflación, desfases en la recaudación y valor ," IMF Staff Papers, Palgrave Macmillan, vol. 24(1), pages 154-167, March.
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    Cited by:

    1. Przemyslaw Wlodarczyk, 2017. "Fiscal sustainability of the Visegrad Group countries in the aftermath of global economic crisis," Lodz Economics Working Papers 2/2017, University of Lodz, Faculty of Economics and Sociology.

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