Inflation, External Debt and Financial Sector Reform: a Quantitative Approach to Consistent Fiscal Policy with an Application to Turkey

38 Pages Posted: 27 Apr 2000 Last revised: 5 Jan 2002

See all articles by Ritu Anand

Ritu Anand

World Bank; National Bureau of Economic Research (NBER)

Sweder van Wijnbergen

Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: October 1988

Abstract

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.

Suggested Citation

Anand, Ritu and van Wijnbergen, Sweder, Inflation, External Debt and Financial Sector Reform: a Quantitative Approach to Consistent Fiscal Policy with an Application to Turkey (October 1988). NBER Working Paper No. w2731. Available at SSRN: https://ssrn.com/abstract=226856

Ritu Anand (Contact Author)

World Bank

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Washington, DC 20433
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Sweder Van Wijnbergen

Universiteit van Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4011 / 4203 (Phone)
+31-35-624 91 82 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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