Harashima, Taiji (2006): The Sustainability of Budget Deficits in an Inflationary Economy.
Download (242kB) | Preview
This paper examines fiscal sustainability in an inflationary environment, particularly the interrelation between government debt and inflation. A model that explicitly incorporates the political utility/objective function of government is constructed. The government’s borrowing behavior and inflation are determined through the simultaneous optimization of government and households. The sustainable fiscal debt in an inflationary environment was found to equal the present value of primary balances discounted by the time preference rate of government, not by the interest rate. This result raises the question of whether it is appropriate to apply the fiscal sustainability test of Hamilton and Flavin to high inflation countries.
|Item Type:||MPRA Paper|
|Original Title:||The Sustainability of Budget Deficits in an Inflationary Economy|
|Keywords:||Fiscal sustainability; Inflation; The present-value of primary balances; The fiscal theory of the price level; Leviathan|
|Subjects:||H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation
|Depositing User:||Taiji Harashima|
|Date Deposited:||27. Nov 2006|
|Last Modified:||12. Feb 2013 03:02|
Ahmed, Shaghil and John H. Rogers. (1995). “Government budget deficits and trade deficits: Are present value constraints satisfied in long-term data?” Journal of Monetary Economics, Vol. 36, pp. 351-74. Alesina, Alberto and Alex Cukierman. (1990). “The Politics of Ambiguity,” The Quarterly Journal of Economics, Vol. 105, No. 4, pp. 829-50. Alesina, Alberto and Allen Drazen. (1991). “Why Are Stabilizations Delayed?” American Economic Review, Vol. 81, No. 5, pp. 1170-88. Blanchard, Olivier, Jean-Claude Chouraqui, Robert P. Hagemann and Nicola Sartor. (1990). “The sustainability of fiscal policy: New answers to an old question,” OECD Economic Studies, Vol. 15, pp. 7-38. Bohn, Henning. (1995). “The Sustainability of Budget Deficits in a Stochastic Economy,” Journal of Money, Credit and Banking, Vol. 27, pp. 257-71. Brennan, Geoffrey and James M. Buchanan. (1980). The power to tax: analytical foundations of a fiscal constitution, Cambridge MA, Cambridge University Press. Buiter, Willem H. (2002). “The Fiscal Theory of the Price Level: A Critique,” Economic Journal, Vol. 122, pp. 459-80. Buiter, Willem H. (2004). “A Small Corner of Intertemporal Public Finance – New Developments in Monetary Economics: Two Ghosts, Two Eccentricities, A Fallacy, A Mirage and A Mythos,” NBER Working Paper No. 10524. Christiano, Lawrence and Terry J. Fitzgerald. (2000). “Understanding the Fiscal Theory of the Price Level,” NBER Working Paper No. 7668. Cochrane, John H. (1998a). “A Frictionless View of US Inflation,” NBER Macroeconomics Annual, Cambridge MA, MIT Press, pp. 323-84. Cochrane, John H. (1998b). “Long-term Debt and Optimal Policy in the Fiscal Theory of the Price Level,” NBER Working Paper No. 6771. Cochrane, John H. (2000). “Money as Stock: Price Level Determination with No Money Demand,” NBER Working Paper No. 7498. Cukierman, Alex, Sebastian Edwards, and Guido Tabellini. (2002). “Seigniorage and Political Instability,” American Economic Review, Vo. 82, No. 3, pp. 537-55. Darrat, Ali F. (2000). “Are budget deficits inflationary? A reconsideration of the evidence,” Applied Economics Letters, Vol. 7, No. 10, pp. 633 - 36. Downs, Anthony. (1957). An economic theory of democracy, Harper, New York. Edwards, Jeremy and Michael Keen. (1996). “Tax Competition and Leviathan,” European Economic Review, Vol. 40, No. 1, pp. 113-34. Fischer, Stanley, Ratna Sahay and Carlos A. Végh. (2002). “Modern Hyper- and High Inflations,” NBER Working Paper 8930. Friedman, Milton. (1969). The Optimal Quantity of money and Other Essays, Chicago: Aldine. Hakkio, Craig. S. and M. Rush. (1991). “Is the Budget Deficit “Too Large?” Economic Inquiry, Vol. 29, pp. 429-45. Hamilton, J. D. and M. A. Flavin. (1986). “On the Limitations of Government Borrowing: A Framework for Empirical Testing,” American Economic Review, Vol. 76, pp. 808-19. Harashima, Taiji. (2004). “The Ultimate Source of Inflation: A Microfoundation of the Fiscal Theory of the Price Level,” EconWPA Working Papers, ewp-mac/ 0409018. Harashima, Taiji. (2005). “The Cause of the Great Inflation: Interactions between the Government and the Monetary Policymakers,” EconWPA Working Papers, ewp-mac/ 0510026. Haug, Alfred A. (1991). “Cointegration and Government Borrowing Constraints: Evidence for the United States,” Journal of Business and Economic Statistics, Vol. 9, pp. 97-101. Karras, Georgios. (1994). “Macroeconomic effects of budget deficits: further international evidence,” Journal of International Money and Finance, Vol. 13, pp. 190-210. Kocherlakota, Narayana and Christopher Phelan. (1999). “Explaining the fiscal theory of the price level,” Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 23, No. 4, pp. 14-23. Leeper, Eric. (1991). “Equilibria under Active and Passive Monetary and Fiscal Policies,” Journal of Monetary Economics, Vol. 27, pp. 129-47. Sims, Christopher A. (1994). “A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy,” Economic Theory, Vol.4, pp.381-99. Sims, Christopher A. (1998). “Econometric implications of the government budget constraint,” Journal of Econometrics, Vol. 83, pp. 9-19. Sims, Christopher A. (2001). “Fiscal Consequence for Mexico Adopting the Dollar,” Journal of Money, Credit and Banking, Vol. 23, pp. 597-625. Tabellini, Guido and Alberto Alesina. (1990). “Voting on the Budget Deficit,” American Economic Review, Vol. 80, No. 1, pp. 37-49. Trehan, B. and C. E. Walsh. (1988). “Common trends, the government budget constraint, and revenue smoothing,” Journal of Economic Dynamics and Control, Vol. 12, pp. 425-44. Wilcox, David W. (1989). “The Sustainability of Government Deficits: Implications of the Present-Value Borrowing Constraint,” Journal of Money, Credit and Banking, Vol. 21, pp. 291-306. Woodford, Michael. (1995). “Price Level Determinacy without Control of a Monetary Aggregate,” Carnegie-Rochester Conference Series on Public Policy, Vol. 43, pp. 1-46. Woodford, Michael. (2001). “Fiscal Requirements for Price Stability,” Journal of Money, Credit and Banking, Vol. 33, pp. 669-728.
Available Versions of this Item
- The Sustainability of Budget Deficits in an Inflationary Economy. (deposited 27. Nov 2006) [Currently Displayed]