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Government Expenditures, Deficits, and Inflation: On the Impossibility of a Balanced Budget

Bruce D. Smith

Federal Reserve Bank of Minneapolis

A model is presented in which governments can select real expenditure levels that are feasible, but are sufficiently high that a balanced budget is impossible. Thus, governments with large expenditures are committed to inflationary finance schemes. This is the case, even though the governments in question have access to lump-sum taxes. In addition, the model can explain why poorer countries tend to make heavier use of the inflation tax than do wealthier countries, and can account for the existence of country-specific fiat monies. The government that does not have access to the printing press can, nonetheless, use emergency taxes or compulsory loans for emergency financing. S.Fischer [1982, p. 297]

DOI

10.2307/1884376

Volume

100 (3)

Pages

715

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