External Debt, Inflation, and the Public Sector: Toward Fiscal Policy for Sustainable Growth |
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| Authors: | van Wijnbergen Sweder |
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| Institution: | Sweder van Wijnbergen is an economist in Country Department II, Latin America and the Caribbean Region, the World Bank. This article, originally prepared for the policy seminar on Adjustment Policies in Izmir, Turkey, on March 28–29, 1988, draws heavily on joint work with several colleagues in the World Bank. In particular the author would like to thank Ritu Anand, Ajay Chhibber, and Roberto Rocha for many stimulating discussions. |
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| Abstract: | Which tradeoffs are involved in formulating an external debtstrategy? Should expenditure be cut to improve the current account,or will this reduce future output growth, thus undermining thebenefits of any debt reduction? Are there alternatives thatallow satisfactory output growth without jeopardizing creditworthiness?How can the necessary surplus of savings over investment bebrought about at levels of investment high enough to sustainoutput growth? Should the government contribute to the internal adjustmentby reducing its deficit? Macroeconomic targets for inflationand growth, and creditworthiness constraints on debt issue,impose restrictions on the extent to which deficits can be financed.Can the government cover the deficit within these targets andconstraints? The absence of such consistency forebodes futurepolicy change and so undermines the credibility of the adjustmentprogram. The author uses empirical work on Turkey to illustratethe interactions between fiscal deficits and the macroeconomicvariables upon which fiscal consistency hinges. |
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