The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Although the deficit is a useful construct for Keynesian analyses of fiscal policy, the deficit appears to be a less useful measure of fiscal policy within all but a restricted class of intertemporal neoclassical models. This paper suggests that the nature of deficits in a simple certainty model with nondistortionary policies, and the in settings with uncertain policy, distortionary policy, and liquidity constraints is, to a large extent, arbitrary. It then posits a more appropriate description of fiscal policy for the class of models in question, and proposes the economically meaningful “fiscal balance rule” as an alternative to the economically arbitrary “balanced budget rule” as a means of assessing whether fiscal policy is intergenerationally tight or loose.