Abstract

This article presents a simple framework to assess the consistency of appropriately defined fiscal deficits with other macroeconomic targets, such as inflation. It also considers the relation of fiscal deficits to output growth, real exchange rate developments, and management of internal and external debt. Finally, it considers the implications of relying on interest-bearing government debt to postpone the adjustment necessary to restore consistency with inflation targets. It demonstrates how the intertemporal budget constraint of the government creates a tradeoff between current and future adjustment. Real interest rates and output growth rates are shown to determine the terms at which this tradeoff takes place. The usefulness of this framework is demonstrated through an analysis of fiscal policy options in Turkey in 1985.

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