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Abstract:
We investigate the
conditions from which inferences can be drawn regarding
sustainability of fiscal stance
on the one hand, and a long-run relationship between inflation
and budget deficits on the other. These
issues have assumed even greater importance in the aftermath of
the collapse of the 1999 stabilization
program in February 2001 that was designed to achieve
sustainability in debt dynamics and
produce a permanent reduction in inflation rates. The first set
of findings indicates nonstationarity in
the discounted debt to GNP ratio process during 1970-2000,
implying an unsustainable fiscal outlook.
The inference does not imply insolvency, but points to the
necessity of a policy change towards
fiscal austerity. The second set of findings pertaining to the
long-run relationship between the inflation
rate, budget deficit, and real output growth suggests two
important results. The first of these is
that the consolidated budget deficit does not have a long-run
component unlike the inflation rate, suggesting
that changes in the consolidated budget deficit have no
permanent effect on the inflation rate.
On the other hand, the PSBR does have a long-run component and
is cointegrated with the inflation
rate, which implies that the PSBR is a better indicator of
fiscal deficits in comparison to the consolidated
budget deficit.
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