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Fiscal deficits, monetary reform, and inflation stabilization in Romania

  • Budina, Nina
  • Van Wijnbergen, Sweder

Unsustainable fiscal deficits were the chief reason for the inflation that has persisted in Eastern Europe since 1989. Deficits need to be cut back, but by how much for a given inflation target? The authors develop a simple framework for debt, the deficit, and inflation to study the interactions between fiscal and monetary policy in Romania's economy. This framework can be used to 1) determine the financeable deficit and the required deficit reduction for a given rate of output growth, inflation rate, and target for debt-output ratios, and 2) find the rate, and target for which nofiscal adjustment is needed. They use this framework to assess consistency between inflation, monetary reform, and fiscal policy in Romania. Many of the issues in Romania are similar to those in other countries. But Romania is an interesting case because of its history of unsuccessful stabilization attempts. The authors'results suggest that fiscal problems during 1992-94 were masked by shifting government expenses to the books of the National Bank of Romania so that the government deficit did not fully reflect public spending. In addition, the effects of delayed fiscal adjustment were mitigated by exchange rate overvaluation and favorable debt dynamics. In the late 1990s, however, debt dynamics worsened and the economy experienced significant real depreciation. That exacerbated the fiscal problems and increased the fiscal adjustment needed to restore consistency.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2298.

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Date of creation: 31 Mar 2000
Date of revision:
Handle: RePEc:wbk:wbrwps:2298
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  1. repec:oup:restud:v:57:y:1990:i:1:p:147-64 is not listed on IDEAS
  2. Budina, Nina & van Wijnbergen, Sweder, 1997. "Fiscal Policies in Eastern Europe," Oxford Review of Economic Policy, Oxford University Press, vol. 13(2), pages 47-64, Summer.
  3. Peter Boswijk, H., 1994. "Testing for an unstable root in conditional and structural error correction models," Journal of Econometrics, Elsevier, vol. 63(1), pages 37-60, July.
  4. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  5. Willem H. Buiter, 1997. "Aspects of fiscal performance in some transition economies under fund-supported programs," LSE Research Online Documents on Economics 20353, London School of Economics and Political Science, LSE Library.
  6. Ritu Anand & Sweder van Wijnbergen, 1988. "Inflation, External Debt and Financial Sector Reform: A Quantitative Approach To Consistent Fiscal Policy With An Application to Turkey," NBER Working Papers 2731, National Bureau of Economic Research, Inc.
  7. Kawai, Masahiro & Maccini, Louis J, 1995. "Twin Deficits versus Unpleasant Fiscal Arithmetic in a Small Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 639-58, August.
  8. Alogoskoufis, George & Christodoulakis, Nikos, 1990. "Fiscal Deficits, Seigniorage and External Debt: The Case of Greece," CEPR Discussion Papers 468, C.E.P.R. Discussion Papers.
  9. Buiter, Willem H., 1993. "Public Debt in the USA: How Much, How Bad and Who Pays?," CEPR Discussion Papers 791, C.E.P.R. Discussion Papers.
  10. van Wijnbergen, Sweder, 1991. "Fiscal Deficits, Exchange Rate Crises and Inflation," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 81-92, January.
  11. Anand, Ritu & van Wijnbergen, Sweder, 1989. "Inflation and the Financing of Government Expenditure: An Introductory Analysis with an Application to Turkey," World Bank Economic Review, World Bank Group, vol. 3(1), pages 17-38, January.
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