Showing papers by "William Easterly published in 1989"

Fiscal adjustment and deficit financing during the debt crisis

Abstract: To study the adjustment to the debt crisis, this paper compares the experience of seven"crisis"debtor countries with those of five"noncrisis"debtor countries. In response to a sharp reduction in external capital flows, the crisis countries rescheduled their debt during 1982-87. The noncrisis group avoided debt resheduling during that period and maintained access to external capital. The paper finds that highly indebted countries are probably better off raising conventional taxes and cutting current spending, rather than raising taxes on financial intermediation and cutting public investment. Shifting to sounder policies may require the breathing space only new external financing or debt relief would provide.

Policy distortions, size of government, and growth

Abstract: This paper analyzes the structural relationship between policies that distort resource allocation and long-term growth. It briefly reviews the Solow model in which steady-state growth depends only on exogenous technological change, but finds it unsatisfactory as a model of long-term growth. The author proposes an increasing-returns model in the spirit of the new literature on economic growth. With increasing returns, endogenous economic variables - and thus policy - will affect the steady-state rate of growth. This model gives output as a linear function of total capital, but a decreasing function of each of two types of capital. The distortion is defined as a policy intervention that increases the cost of using one of the types of capita. The results suggest that simple linear relationships between distortions and growth, or between size of government and growth, are untenable. Easterly's model shows that reducing the distortions does not have an equal effect on growth in all circumstances. The effect depends on how flexible the economy is, how large the share of the factor being penalized in production is, and how high the distortions are initially. Small changes in either very low or very high levels of initial distortions have a minimal effect on growth.

A consistency framework for macroeconomic analysis

Abstract: Macroeconomic consistency is the requirement that budget constraints be observed for all participants in the economy. This paper presents the elements of a macroeconomic accounting framework in current prices. The framework is based on five accounts, corresponding to the following macro identities: (1) national accounts identity; (2) government identity; (3) balance of payments identity; (4) monetary identity; and (5) nonfinancial private sector identity. A basic consistency framework requires that all of these identities be simultaneously satisfied. These would be the miniumum elements of a consistency framework. The paper also indicates where further disaggregation might be useful. It presents the individual accounts first, and then integrates them through a matrix of income expenditure, saving, and asset and liability accumulation. Examples of this framework are presented for Colombia and Zimbabwe.

How much fiscal adjustment is enough? The case of Colombia

Abstract: This paper concludes that Colombia's impressive fiscal adjustment during 1985 - 1987 was due to structural changes in fiscal policy, not simply to such fortuitous events as the coffee boom. Although impressive, the fiscal adjustment fell short of actually improving the government's net financial position. Total public debt as a percentage of GDP was roughly unchanged, even after correcting for the effect of currency devaluation on dollar denominated instruments. Public development lending as a percentage of GDP fell slightly during the same period. The model simulations suggest that to reduce interest rates to more manageable levels would require continued reduction of the fiscal deficit, below levels currently envisioned. To reduce inflation would require even tighter fiscal policy. The magnitudes of required deficit reduction do not seem out of reach however, even allowing for uncertainty about the figures.