Inflation and the Financing of Government Expenditure: an Introductory Analysis with an Application to Turkey |
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| Authors: | Anand Ritu; van Wijnbergen Sweder |
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| Institution: | Ritu Anand is on the Finance Commission of the Government of India and was an economist in the Europe, Middle East, and North Africa Country Department 2 of the World Bank at the time this article was written. Sweder van Wijnbergen is an economist in the Latin America and the Caribbean Country Department 2 of the World Bank. They are indebted to Halouk Tukel and Teoman Akgur of the Central Bank of Turkey and to participants in seminars at the Central Bank and State Planning Organization in Ankara for helpful comments. |
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| Abstract: | This article presents a simple framework to assess the consistencyof appropriately defined fiscal deficits with other macroeconomictargets, such as inflation. It also considers the relation offiscal deficits to output growth, real exchange rate developments,and management of internal and external debt. Finally, it considersthe implications of relying on interest-bearing government debtto postpone the adjustment necessary to restore consistencywith inflation targets. It demonstrates how the intertemporalbudget constraint of the government creates a tradeoff betweencurrent and future adjustment. Real interest rates and outputgrowth rates are shown to determine the terms at which thistradeoff takes place. The usefulness of this framework is demonstratedthrough an analysis of fiscal policy options in Turkey in 1985. |
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