The Sustainability of Budget Deficits in an Inflationary Economy

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines fiscal sustainability in an inflationary environment, particularly the interrelation between government debt and inflation. A model that explicitly incorporates the political utility/objective function of government is constructed. The government’s borrowing behavior and inflation are determined through the simultaneous optimization of government and households. The sustainable fiscal debt in an inflationary environment was found to equal the present value of primary balances discounted by the time preference rate of government, not by the interest rate. This result raises the question of whether it is appropriate to apply the fiscal sustainability test of Hamilton and Flavin to high inflation countries.

Keywords: Fiscal sustainability; Inflation; The present-value of primary balances; The fiscal theory of the price level; Leviathan (search for similar items in EconPapers)
JEL-codes: E31 H63 (search for similar items in EconPapers)
Date: 2006-11-27
New Economics Papers: this item is included in nep-cba, nep-mac and nep-pbe
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/905/1/MPRA_paper_905.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/1088/1/MPRA_paper_1088.pdf revised version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:905

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().