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Inflation and the Impact of Budgets

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  • Rober Ackland

Abstract

This article focuses on the adjustment of budget figures for the effect of inflation on the value of government debt. It asks whether such adjustment improves their performance as a measure of ‘fiscal impact’. If inflation significantly influences the impact of budgets on the real economy, policy‐makers may make inappropriate fiscal policy decisions if they are guided by unadjusted budget figures. The article argues that if agents perceive holdings of government debt as part of their wealth, changes in the real value of debt will have an effect on consumption behaviour. Therefore to assess the impact of fiscal policy on consumption it may be necessary to adjust budget figures so that they accurately indicate changes in the real value of debt held by the private sector. This article adjusts a series of structural public sector borrowing requirements (PSBR) for the effect of inflation on the real value of government debt held by the private sector. An empirical analysis concludes that the inflation‐adjusted budget series provides a superior measure of fiscal impact on consumption, and hence the real economy.

Suggested Citation

  • Rober Ackland, 1991. "Inflation and the Impact of Budgets," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 24(3), pages 28-37, July.
    • Handle: RePEc:bla:ausecr:v:24:y:1991:i:3:p:28-37
    DOI: 10.1111/j.1467-8462.1991.tb00395.x
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    References listed on IDEAS

    as
    1. Tony Makin, 1990. "The Real Federal Budget Imbalance," The Economic Record, The Economic Society of Australia, vol. 66(3), pages 249-253, September.
    2. Butkiewicz, James L., 1983. "The market value of outstanding government debt : Comment," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 373-379.
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    Cited by:

    1. Jeff Borland, 1991. "Incomes Policies in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 24(2), pages 45-50, April.

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