Fiscal Deficits, Monetary Reform, and Inflation Stabilization in Romania
Unsustainable fiscal deficits were the chief reason for the inflation that has persisted in Eastern Europe since 1989. Deficits need to be cut back, but by how much for a given inflation target? The authors develop a simple framework for debt, the...
| Main Authors: | , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/03/437890/fiscal-deficits-monetary-reform-inflation-stabilization-romania http://hdl.handle.net/10986/22360 |
| Summary: | Unsustainable fiscal deficits were the
chief reason for the inflation that has persisted in Eastern
Europe since 1989. Deficits need to be cut back, but by how
much for a given inflation target? The authors develop a
simple framework for debt, the deficit, and inflation to
study the interactions between fiscal and monetary policy in
Romania's economy. This framework can be used to 1) determine
the financeable deficit and the required deficit reduction
for a given rate of output growth, inflation rate, and
target for debt-output ratios, and 2) find the rate, and
target for which no fiscal adjustment is needed. They use
this framework to assess consistency between inflation,
monetary reform, and fiscal policy in Romania. Many of the
issues in Romania are similar to those in other countries.
But Romania is an interesting case because of its history of
unsuccessful stabilization attempts. The authors' results
suggest that fiscal problems during 1992-94 were masked by
shifting government expenses to the books of the National
Bank of Romania so that the government deficit did not fully
reflect public spending. In addition, the effects of delayed
fiscal adjustment were mitigated by exchange rate
overvaluation and favorable debt dynamics. In the late
1990s, however, debt dynamics worsened and the economy
experienced significant real depreciation. That exacerbated
the fiscal problems and increased the fiscal adjustment
needed to restore consistency. |
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