The economics of the government budget constraint

Stanley Fischer, William Easterly

    Research output: Contribution to journalArticle

    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.

    Original languageEnglish (US)
    Pages (from-to)127-142
    Number of pages16
    JournalWorld Bank Research Observer
    Volume5
    Issue number2
    DOIs
    StatePublished - Jul 1990

    Fingerprint

    budget deficit
    Budget Constraint
    Budgets
    macroeconomics
    deficit
    budget
    Economics
    Macroeconomics
    income
    Gross Domestic Product
    debt crisis
    Dynamic Equation
    balance of payments
    Gross National Product
    national income
    fiscal policy
    Printing
    Economic Inflation
    interest rate
    debt

    ASJC Scopus subject areas

    • Molecular Biology
    • Statistics and Probability
    • Computational Mathematics
    • Development
    • Economics and Econometrics

    Cite this

    The economics of the government budget constraint. / Fischer, Stanley; Easterly, William.

    In: World Bank Research Observer, Vol. 5, No. 2, 07.1990, p. 127-142.

    Research output: Contribution to journalArticle

    Fischer, Stanley ; Easterly, William. / The economics of the government budget constraint. In: World Bank Research Observer. 1990 ; Vol. 5, No. 2. pp. 127-142.
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