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The macroeconomics of the public sector deficit : the case of Colombia


  • Easterly, William


The management of fiscal deficits and their financing in Colombia has been generally sound. This paper shows how episodes of loose fiscal policy have been minor compared to other Latin American countries. The near-crisis of the early 1980s was addressed in a timely way through a sharp fiscal adjustment. An analysis shows this adjustment to have been a combination of good luck and fundamental policy changes, with more emphasis on the latter. The means of fiscal adjustment chosen were sometimes suboptimal from the standpoint of long-run growth, which will eventually require some fiscal reform to reverse some of the measures implemented during 1985-89. The analysis of this paper shows a close relationship between the means of financing of the fiscal deficit and macroeconomic outcomes in Colombia. A simulation model traces how money-financed and domestic debt-financed fiscal deficits translate into inflation and the real interest rate. It traces the relationship between externally-financed fiscal deficits and the real exchange rate and finds that a good deal of the changes in the real exchange rates over 1975-87 are attributable to fiscal policy. Finally, these models are combined to show how the external versus domestic debt financing affects the simultaneous determination of the real exchange rate and real interest rate.

Suggested Citation

  • Easterly, William, 1991. "The macroeconomics of the public sector deficit : the case of Colombia," Policy Research Working Paper Series 626, The World Bank.
  • Handle: RePEc:wbk:wbrwps:626

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    Cited by:

    1. Miguel Kiguel, 1994. "Exchange Rate Policy, the Real Exchange Rate, and Inflation," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 31(93), pages 229-250.
    2. ZeinabPartow, 2005. "La Relación Inflación-Crecimiento: Un Resumen Con Algunas Implicaciones Para Colombia," BORRADORES DE ECONOMIA 003079, BANCO DE LA REPÚBLICA.
    3. RAMDE, Fousseni, 2015. "Institution, investissements et croissance dans l’UEMOA: une approche panel VAR
      [Institution, investments and growth in WAEMU: a panel VAR approach]
      ," MPRA Paper 82417, University Library of Munich, Germany, revised 01 Jun 2017.
    4. Zeinab Partow, 1995. "La Relación Inflación-Crecimiento: Un Resúmen con algunas Implicaciones para Colombia," Borradores de Economia 023, Banco de la Republica de Colombia.


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