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The macroeconomics of public sector deficits : a synthesis

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  • Easterly, William
  • Schmidt-Hebbel, Klaus

Abstract

Fiscal deficits have been at the forefront of macroeconomic adjustment in the 1980s, both in developing and developed countries. Fiscal deficits were blamed in good part for the assortment of ills that beset developing countries in the 1980s: over-indebtedness leading to the debt crisis beginning in 1982, high inflation, and poor investment and growth performance. This paper will examine the evidence for the macroeconomic effects of fiscal deficits, using the results of a set of ten case studies done for the Bank research project,"The Macroeconomics of Public Sector Deficits."The ten cases were Argentina, Chile, Colombia, Cote d'Ivoire, Ghana, Morocco, Mexico, Pakistan, Thailand and Zimbabwe. The authors first present a summary of the stylized facts on fiscal adjustment. Then the results are presented of the decomposition of the deficit in the case studies. The results of the case studies are then used to relate deficits to macro economic imbalances: first by analyzing the relationship of deficits to private consumption and investment; and second by examining the relationship of deficits to external imbalances. While macroeconomic imbalances are clearly interrelated, the authors assume the effects of such an interrelationship are small and use a sequence of partial equilibrium analysis of each type of imbalance.

Suggested Citation

  • Easterly, William & Schmidt-Hebbel, Klaus, 1991. "The macroeconomics of public sector deficits : a synthesis," Policy Research Working Paper Series 775, The World Bank.
    • Handle: RePEc:wbk:wbrwps:775
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    References listed on IDEAS

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    Cited by:

    1. Madison, Florian, 2024. "A microfounded approach to currency substitution and government policy," Journal of Economic Theory, Elsevier, vol. 219(C).
    2. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2006. "Government finance in the wake of currency crises," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 401-440, April.
    3. Sadik-Zada, Elkhan Richard & Gatto, Andrea, 2019. "Determinants of the Public Debt and the Role of the Natural Resources: a Cross-Country Analysis," ETA: Economic Theory and Applications 285026, Fondazione Eni Enrico Mattei (FEEM).
    4. Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995. "Money Demand and Seigniorage-Maximizing Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 583-603, May.
    5. Mr. Guillermo Calvo & Mr. Carlos A. Végh Gramont, 1992. "Currency Substitution in Developing Countries: An Introduction," IMF Working Papers 1992/040, International Monetary Fund.
    6. Busato, Francesco & Varlese, Monica & Ulloa Severino, Claudia, 2022. "Public debt heterogeneity at country level: an empirical analysis," MPRA Paper 113812, University Library of Munich, Germany.
    7. World Bank, 2004. "Guinea : Strengthening Public Expenditure Management for Poverty Reduction and Growth," World Bank Publications - Reports 15672, The World Bank Group.
    8. Bouton, Lawrence & Jones, Christine & Kiguel, Miguel, 1994. "Macroeconomic reform and growth in Africa : adjustment in Africa revisited," Policy Research Working Paper Series 1394, The World Bank.
    9. Sanogo, Issa & Gyengani, Zakaria, 2008. "Private investment in guinea, does macro-instability matter? A comparative analysis," MPRA Paper 11606, University Library of Munich, Germany.
    10. Kiguel, Miguel A., 1992. "Exchange rate policy, the real exchange rate, and inflation : lessons from Latin America," Policy Research Working Paper Series 880, The World Bank.
    11. Soledad Arellano & Felipe Larraín, 1996. "Tipo de Cambio Real y Gasto Público: Un Modelo Econométrico para Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 33(98), pages 47-76.
    12. ZeinabPartow, 2005. "La Relación Inflación-Crecimiento: Un Resumen Con Algunas Implicaciones Para Colombia," Borradores de Economia 3079, Banco de la Republica.
    13. Marshall, Jorge & Schmidt-Hebbel, Klaus, 1989. "Economic and policy determinants of public sector deficits," Policy Research Working Paper Series 321, The World Bank.
    14. Zeinab Partow, 1995. "La Relación Inflación-Crecimiento: Un Resúmen con algunas Implicaciones para Colombia," Borradores de Economia 023, Banco de la Republica de Colombia.
    15. Fengsheng Chien & Ka Yin Chau & Talla M. Aldeehani & Pham Quang Huy & Luc Phan Tan & Muhammad Mohsin, 2022. "Does external debt as a new determinants of fiscal policy influence sustainable economic growth: implications after COVID-19," Economic Change and Restructuring, Springer, vol. 55(3), pages 1717-1737, August.
    16. Stevenson, Gail, 1992. "How public sector pay and employment affect labor markets : research issues," Policy Research Working Paper Series 944, The World Bank.
    17. Le Houerou, Philippe & Sierra, Hector, 1993. "Estimating quasi-fiscal deficits in a consistency framework : the case of Madagascar," Policy Research Working Paper Series 1105, The World Bank.
    18. Montiel, Peter J., 1993. "Fiscal aspects of developing countrydebt problems and debt and debt-service reduction operations : a conceptual framework," Policy Research Working Paper Series 1073, The World Bank.
    19. Bogetic, Zeljko & Hillman, Arye L., 1994. "The tax base in transition : the case of Bulgaria," Policy Research Working Paper Series 1267, The World Bank.
    20. Thorne, Alfredo E. & Dastgheib, Azita, 1992. "Public sector debt, fiscal deficits, and economic adjustment : a comparative study of six EMENA countries," Policy Research Working Paper Series 840, The World Bank.
    21. RAMDE, Fousseni, 2015. "Institution, investissements et croissance dans l’UEMOA: une approche panel VAR [Institution, investments and growth in WAEMU: a panel VAR approach]," MPRA Paper 82417, University Library of Munich, Germany, revised 01 Jun 2017.

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