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Inflation and the Impact of Budgets
Author(s) -
Ackland Rober
Publication year - 1991
Publication title -
australian economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.308
H-Index - 29
eISSN - 1467-8462
pISSN - 0004-9018
DOI - 10.1111/j.1467-8462.1991.tb00395.x
Subject(s) - economics , inflation (cosmology) , debt , fiscal policy , consumption (sociology) , monetary economics , value (mathematics) , macroeconomics , real interest rate , private sector , government debt , government (linguistics) , government budget , internal debt , private consumption , monetary policy , public finance , social science , linguistics , philosophy , physics , machine learning , sociology , theoretical physics , computer science , economic growth
This article focuses on the adjustment of budget figures for the effect of inflation on the value of government debt. It asks whether such adjustment improves their performance as a measure of ‘fiscal impact’. If inflation significantly influences the impact of budgets on the real economy, policy‐makers may make inappropriate fiscal policy decisions if they are guided by unadjusted budget figures. The article argues that if agents perceive holdings of government debt as part of their wealth, changes in the real value of debt will have an effect on consumption behaviour. Therefore to assess the impact of fiscal policy on consumption it may be necessary to adjust budget figures so that they accurately indicate changes in the real value of debt held by the private sector. This article adjusts a series of structural public sector borrowing requirements (PSBR) for the effect of inflation on the real value of government debt held by the private sector. An empirical analysis concludes that the inflation‐adjusted budget series provides a superior measure of fiscal impact on consumption, and hence the real economy.