Government Budget Constraint
The government budget constraint is an accounting identity linking the monetary authority’s choices of money growth or nominal interest rate and the fiscal authority’s choices of spending, taxation, and borrowing at a point in time and across time. The intertemporal links create a rich set of possible outcomes from standard macro policy experiments. Taking the government budget constraint seriously can overturn some widely held beliefs about policy effects.
KeywordsBarro, R. Bond–money ratio Endowment economy Euler equation Fiscal policy Fiscal theory of the price level Fisher relation Government budget constraint Household budget constraint Inflation Markov processes Monetary policy Money supply Ricardian equivalence Ricardo, D.
- Becker, R., and J. Boyd III. 1997. Capital theory, equilibrium analysis, and recursive utility. Malden: Blackwell.Google Scholar
- Christ, C. 1967. A short-run aggregate-demand model of the interdependence and effects of monetary and fiscal policies with Keynesian and classical interest elasticities. American Economic Review 57: 434–443.Google Scholar
- Cochrane, J. 1999. A frictionless view of U.S. inflation. In NBER macroeconomics annual 1998, ed. B. Bernanke and J. Rotemberg. Cambridge, MA: MIT Press.Google Scholar
- Davig, T., and E. Leeper. 2005. Fluctuating macro policies and the fiscal theory. Working paper no. 11212. Cambridge, MA: NBER.Google Scholar
- Davig, T., E. Leeper, and H. Chung. 2004. Monetary and fiscal policy switching. Working paper no. 10362. Cambridge, MA: NBER.Google Scholar
- Hamilton, J., and M. Flavin. 1986. On the limitations of government borrowing: A framework for empirical testing. American Economic Review 76: 808–819.Google Scholar
- Hansen, L., W. Roberds, and T. Sargent. 1991. Time series implications of present value budget balance and of martingale models of consumption and taxes. In Rational expectations econometrics, ed. L. Hansen and T. Sargent. Boulder: Westview Press.Google Scholar
- Ricardo, D. 1821. On the principles of political economy and taxation. 3rd edn. London: John Murray.Google Scholar
- Sargent, T., and N. Wallace. 1981. Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review 5: 1–17.Google Scholar
- Sidrauski, M. 1967. Rational choice and patterns of growth in a monetary economy. American Economic Review Papers and Proceedings 57: 534–544.Google Scholar
- Woodford, M. 1995. Price-level determinacy without control of a monetary aggregate. In Carnegie-Rochester conference series on public policy, ed. B. McCallum and C. Plosser.Google Scholar