Inflation, external debt, and financial sector reform : a quantitative approach to consistent fiscal policy

The paper presents and applies an integrated framework to assess the consistency between fiscal deficits and other macroeconomic targets, in particular output growth and the rate of inflation. The model centers around the government budget constraint and can be used to either derive the financeable deficit given inflation targets, or to derive an equilibrium inflation rate for which no fiscal ajdustment would be necessary. The model is used to analyze the relationship between inflation, external debt and financial sector reform in Turkey. The model can also be used to see what happens if the required fiscal adjustment is postponed. The authors explore two scenarios : one in which fiscal adjustment takes place eventually, and one in which the inflation tax is used eventually to close any financing gap.