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Subsidy, Fiscal Deficit and Inflation in Developing Countries

Author

Listed:
  • Ambar Ghosh

    (Center for Economic Studies, Department of Economics, Presidency College, 86/1, College Street, Kolkata-700073, India)

  • Chandana Ghosh

    (Economic Research Unit, Indian statistical institute, 203 B.T. Road, Kolkata 700108, India)

Abstract

Proponents of the New Economic Policy are of the view that, if subsidies are reduced and funds released therefrom are used to step up public investment to give a boost to aggregate investment, then fiscal deficit will stay unchanged and there will be no disturbance to the macroeconomic stability to the economy. This paper shows that the relationship between investment, fiscal deficit and macroeconomic stability is a complex one. More precisely, the paper uses a structuralist dual economy model to show that there exist conditions under which if subsidies are reduced and public investment is stepped up to keep unchanged or raise aggregate investment, then both fiscal deficit and inflation will rise. Moreover, the conditions under which this happens are precisely those, which have been presumed to be true by the proponents of the New Economic Policy.

Suggested Citation

  • Ambar Ghosh & Chandana Ghosh, 2003. "Subsidy, Fiscal Deficit and Inflation in Developing Countries," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 38(1), pages 21-57, January.
    • Handle: RePEc:dse:indecr:v:38:y:2003:i:1:p:21-57
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    Cited by:

    1. Ziesemer, Thomas, 2005. "How to cure the trade balance? Reducing budget deficits versus devaluations in the presence of J- and W-curves for Brazil," Research Memorandum 018, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).

    More about this item

    Keywords

    Subsidy; Fiscal Deficit; Inflation; Investment;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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