This paper looks at the dynamics of (dis)equilibria during post-command transition. It tries to define an optimal mix between external and internal disequilibrium and to apply this concept to the analysis of the Romanian economy. The forced adjustment of the balance of payments in the 1980s is presented as a prologue to the scrutiny of transformation policy underway; results and dilemmas of macro-stabilization are dealt with in this respect. The paper ends by providing some insights into the problematique of understanding (dis)equilibria in transforming economies.
The paper considers that strain is the main source of inter-enterprise arrears in post-command economies. Strain can be linked with the structure of the economy and the size of resource misallocation. Inter-enterprise arrears “soften” markets and operate as a self-protecting device against the pressure for change. As temporary quasi-inside money, arrears fuel inflation. A paradox of policy credibility in undertaking structural adjustment is emphasized. Rising exports can be a possible side effect of arrears and a constraining factor: the size of the economy is seen as affecting the relationship between arrears and exports. An operational framework for containing arrears would Include: “breaking up” structure; Imposing a disciplining “straitjacket” on structure; industrial policy (“picking losers among losers”) and targeted external assistance. Containing arrears can not be a one shot policy-drive; here one deals with a process that will overlap in time with the evolving environment.
Macroeconomic stabilization and structural reforms in Russia since 1992 have been proceeding in a rather chaotic fashion. The Russian variety of economic gradualism has seen a sharp decline in output, though less than indicated by official statistics, and relatively resilient household consumption. Hyperinflation has been avoided so far by tightened financial policies, but remains a threat. Conventional macroeconomic wisdom on the relation between money, prices and output is relevant for Russia. Moreover, stabilization and structural change interact and are mutually reinforcing.
Using a database of up to 62 variables for 196 countries over 57 years, a hyperinflation cycle has been characterized to propose a broader setting of stylized facts. Beyond the usual facts, the findings in this paper contribute to the literature of modern hyperinflations in that these cycles occur in contexts where there are (i) depressed economic freedoms, (ii) deteriorated socioeconomic conditions and rule of law, as well as (iii) high levels of domestic conflictivity and government instability. Despite social infraestructure factors improve during stabilization, they keep being substantially lower than the respresentative non-hyperinflation country, suggesting an important role for them in the occurrence of modern hypeinflations. Finally, the role of international financial assistance in stabilization was studied, noting that (i) a clear majority of hyperinflation countries used it, further improving their (ii) economic freedoms, and allowing themselves (iii) greater fiscal flexibility and (iv) more exchange rate stability.
The paper explores the extent to which the pressure of debt service on other spending items may push governments to embark on fiscal consolidation beyond what is strictly necessary to secure solvency. The empirical analysis identifies thresholds of interest bill indicators beyond which governments appear to shift to policies aimed at durably curbing the debt trajectory. Hence, in the current context of high inherited public debts, countries experiencing rising borrowing costs and interest payments would be more likely to enact more aggressive fiscal consolidations than warranted by strict solvency concerns. Conversely, those benefiting from persistently low interest rates despite rising debt stocks would likely opt for a more gradual fiscal consolidation path than what solvency considerations would normally dictate.
Fiscal rules are being increasingly used by both emerging and developed economies. This paper analyzes two alternative fiscal policy rules in terms of their impact on debt sustainability: a rule that fixes the ratio of primary surplus to GDP ("fixed surplus rule") and one that sets the primary surplus as a linear function of debt to GDP ratio ("variable surplus rule"). A simple debt dynamics equation, incorporating real shocks, is constructed, and the probability of exceeding the critical debt level is simulated using Monte Carlo techniques. The results show that the variable surplus rule performs better than the simple fixed surplus rule, by reducing debt sustainability concerns and the necessary medium-term primary surplus. This result hinges on the government's ability to make a credible commitment to the variable surplus rule in the medium run.
The paper analyzes common issues emerging from the recent experience with Fund-supported programs in Hungary, Poland, Czechoslovakia, Bulgaria and Romania. These comprise the initial price-overshooting and the output collapse, fiscal sustainability as well as the financial and structural problems associated with bad loan portfolios and sluggish implementation of privatization programs. Substantial success, in varying degrees, has been achieved in the initial macro-stabilization and opening-up effort. At the same time mounting difficulties with fiscal and monetary control may be emerging, as a result of social and political pressures and insufficiently clear policy signals on the micro-issues involving the sharp structural transformation of the productive and financial systems.
Huixin Bi, Ms. Wenyi Shen, and Shu-Chun Susan Yang
This paper studies the main channels through which interest rate normalization has fiscal
implications in the United States. While unexpected inflation reduces the real value of
government liabilities, a rising policy rate increases government financing needs because of
higher interest payments and lower real bond prices. After an initial decline, the real
government debt burden rises even with higher tax revenues in an expansion. Given the
current net debt-to-GDP ratio at around 80 percent, interest rate normalization leads to a
negligible increase in the sovereign default risk of the U.S. federal government, despite a
much higher federal debt-to-GDP ratio than the post-war historical average.