Inflation, External Debt and Financial Sector Reform: A Quantitative Approach to Consistent Fiscal Policy with an Application to Turkey, Issue 2731
National Bureau of Economic Research, 1988 - Budget deficits - 38 pages
This paper presents and applies an integrated framework to assess the consistency between fiscal deficits and other macroeconomic targets, such as output growth and the rate of inflation. The model centers around the government budget constraint and can be used to either derive the financeable deficit given inflation targets, or to derive an equilibrium inflation rate for which no fiscal adjustment would be necessary. The financeable deficit is defined as the deficit that does not require more financing than is compatible with sustainable external and internal borrowing, and existing targets for inflation and output growth. The model can assess the impact on the relation between fiscal adjustment and sustainable inflation rates of financial sector reforms affecting base money demand, of changes in interest rates paid on foreign and domestic public sector debt, of output growth targets and of exchange rate policy. The analysis furthermore incorporates an approach, due to Cohen (1986), to the derivation of a sustainable external debt policy. Finally, the model can also be used to see what happens if the required fiscal adjustment is postponed. We explore two alternatives: one where fiscal adjustment takes place eventually, and one where the inflation tax is used eventually to close any financing gap. The model is applied to an analysis of inflation, external debt and financial sector reform in Turkey.
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analysis APPLICATION TO TURKEY APPROACH TO CONSISTENT approach to inflation asset demand functions base money demand Central Bank's profit changes in financial Cohen CONSISTENT FISCAL POLICY creditworthiness DEBT AND FINANCIAL debt-export ratio debt-output ratio demand deposits demand for base deposit rates derive domestic debt issue empirical equation equilibrium inflation rate exchange rate policy exchange rate regime external debt financeable deficit financial sector model financial sector reform financial sector regulation fiscal deficits fixed exchange rate foreign borrowing foreign debt framework given inflation rate given inflation targets Gulf countries impact increase inflation tax revenue log(yt macroeconomic targets money creation nfa)E nominal devaluation nominal interest rates non-interest deficit percent of GNP private sector public finance approach real exchange rate real interest rates real money stock real value relation between fiscal required deficit reduction reserve money reserve requirements revenue from monetization Ritu Anand Section seignorage solvency Turkish exports