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

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  • Rodriguez, Carlos Alfredo

Abstract

Argentina has had a quarter century without growth at a time of rapid economic growth in the rest of the world. This paper looks at the role that public sector behavior, particularly government spending, taxation and deficit financing, may have had on the economic stagnation in Argentina. Government spending declined when the final crisis of the Argentine economy began in 1982, but more because of resource constraints than deliberate political action. The government ran a primary deficit every year from 1961 to 1989, so it issued money and interest-bearing debt. As a result, the economy experienced high real interest rates and inflation. Despite heavy fiscal pressure, fiscal spending has continued to grow, systematically exceeding revenues. From 1964 to 1975, the deficit was financed by creating money; with the fall of Peron and the beginning of a military regime, debt financing became significant. The regression study in this report shows that every 1 percent of primary deficit is financed with 0.7 percent of revenue from creating money. Public debt plays a peculiar role in Argentina's finances. The central bank has become the chief borrower of about 80 percent of the private banks'lending power. In this context, a policy of tight money to reduce aggregate demand basically increases the transfers from the public to the private sector because of the higher deficit that the rise in interest rates generates.

Suggested Citation

  • Rodriguez, Carlos Alfredo, 1991. "The macroeconomics of the public sector deficit : the case of Argentina," Policy Research Working Paper Series 632, The World Bank.
  • Handle: RePEc:wbk:wbrwps:632
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    References listed on IDEAS

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    1. Carlos A. Rodríguez, 1990. "Managing Argentina's External Debt: The Contribution of Debt Swaps," CEMA Working Papers: Serie Documentos de Trabajo. 68, Universidad del CEMA.
    2. Aquiles A. Almansi & Carlos A. Rodríguez, 1990. "Reforma Monetaria y Financiera en Hiperinflación," CEMA Working Papers: Serie Documentos de Trabajo. 67, Universidad del CEMA.
    3. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-625, June.
    4. Rodriguez, Carlos Alfredo, 1989. "Macroeconomic policies for structural adjustment," Policy Research Working Paper Series 247, The World Bank.
    5. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-594, June.
    6. Rodriguez, Carlos Alfredo, 1982. "The Argentine stabilization plan of December 20th," World Development, Elsevier, vol. 10(9), pages 801-811, September.
    7. Dornbusch, Rudiger, 1974. "Tariffs and nontraded goods," Journal of International Economics, Elsevier, vol. 4(2), pages 177-185, May.
    8. Rudiger Dornbusch & Juan Carlos de Pablo, 1987. "Argentina: Debt and Macroeconomic Instability," NBER Working Papers 2378, National Bureau of Economic Research, Inc.
    9. Jacob A. Frenkel & Carlos A. Rodriguez, 1982. "Exchange Rate Dynamics and the Overshooting Hypothesis," NBER Working Papers 0832, National Bureau of Economic Research, Inc.
    10. Roque B. Fernández, 1982. "La Crisis Financiera Argentina: 1980-1982," CEMA Working Papers: Serie Documentos de Trabajo. 35, Universidad del CEMA.
    11. Carlos A. Rodríguez & Larry A. Sjaastad, 1979. "El Atraso Cambiario en Argentina: Mito o Realidad?," CEMA Working Papers: Serie Documentos de Trabajo. 2, Universidad del CEMA.
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    Citations

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    Cited by:

    1. Vittorio Corbo & Stanley Fischer, "undated". "Lessons from the Chilean Stabilization and Recovery," Documentos de Trabajo 158, Instituto de Economia. Pontificia Universidad Católica de Chile..
    2. Soledad Arellano & Felipe Larraín, 1998. "Comment to the Comment by Sjaastad," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 35(104), pages 151-156.
    3. Luis Felipe Lagos, "undated". "Reflexiones en Torno a la Inflación en Chile," Documentos de Trabajo 167, Instituto de Economia. Pontificia Universidad Católica de Chile..
    4. Morisset, Jacques & Izquierdo, Alejandro, 1993. "Effects of tax reform on Argentina's revenues," Policy Research Working Paper Series 1192, The World Bank.
    5. 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.
    6. Soledad Arellano & Felipe Larraín, 1996. "Tipo de Cambio Real y Gasto Público: Un Modelo Econométrico para Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 33(98), pages 47-76.
    7. Singh, Nirvikar & Srinivasan, T. N., 2004. "Fiscal Policy in India: Lessons and Priorities," Santa Cruz Department of Economics, Working Paper Series qt8nx3v467, Department of Economics, UC Santa Cruz.

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