Title: THE ECONOMICS OF THE GOVERN9MENT BUDGET CONSTRAINT
Abstract: This article summarizes the simple analytics of the macroeconomic effects of government budget deficits. The presentation is organized around three key relationships: the national income accounts budget deficit identity, the deficit financing identity, and the dynamic equation for the evolution of the ratio of public debt to gross national product. The national income accounts identity highlights the effect of the deficit on domestic saving and investment and the current account. Examining the financing of the deficit brings to light the different kinds of macroeconomic imbalance the deficit can cause-as a first approximation, printing money excessively shows up as inflation, excessive use of foreign reserves leads to crises in the balance of payments, high foreign borrowing leads to a debt crisis, and too much domestic borrowing leads to high real interest rates and crowding out of private investment. The debt dynamics equation is used to show the long-run constraints on fiscal policy. It is increasingly recognized that sustained economic growth is possible only within a sound macroeconomic framework and that in such a framework fiscal policy plays a key role. In this article we draw on recent developments in the analysis of the consequences of deficit finance to show how and why sound fiscal policy is so crucial to the achievement of macroeconomic stability. We are not here concerned with the effects of fiscal policy on resource allocation, important as these undoubtedly are (see World Bank 1988 for comparative data on government revenues and expenditure and for an authoritative modern account of the role of fiscal policy). Instead, this article focuses on the
Publication Year: 1990
Publication Date: 1990-01-01
Language: en
Type: article
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