Working Paper: CEPR ID: DP260
Authors: Willem H. Buiter
Abstract: The paper analyzes the role of fiscal policy in the restoration of internal and external macroeconomic equilibrium and in achieving structural adjustment, i.e. major changes in the patterns of sectoral and intertemporal resource allocation. The focus is on developing and new industrial countries which are in need of both stabilization and structural adjustment. The external transfer problem and the associated internal fiscal and real resource transfer problems are analyzed with special emphasis on possible causes for the breakdown of the internal and external transfer processes. The concepts of national and public sector solvency are used to evaluate the mutual consistency and feasibility of fiscal, financial and monetary plans. Special attention is devoted to the inflation tax and to the links between the fiscal deficit and inflation.
Keywords: stabilization; structural adjustment; fiscal policy; internal transfers; external transfers
JEL Codes: 311; 321; 431
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal tightening (E62) | Improvement in current account balance (F32) |
| Increased taxes or reduced public spending (H69) | Fiscal tightening (E62) |
| Fiscal retrenchment (E62) | Reduction in national absorption relative to national income (H69) |
| Improvement in current account balance (F32) | Increase in combined private and public sector financial surpluses (H62) |
| Public sector deficit (H69) | External deficit (H62) |
| Reduction in public sector deficit (H69) | Improvement in external account (F32) |
| Fiscal measures (E62) | Current account improvement (F32) |
| Intertemporal allocation of resources (D15) | Likelihood of achieving current account improvement through fiscal measures (F32) |