Fiscal Issues in Macroeconomic Stabilization: A Structuralist Perspective

This paper is about fiscal policy issues that arise during macroeconomic stabilization in developing economies. The empirical background comes from a recent study of stabilization episodes in 18 countries, organized by the World Institute for Development Economics Research (WIDER) in Helsinki. The results are reviewed in a summary monograph by Taylor (1988), and the country papers are available from WIDER. Fiscal policy cannot be described outside a macroeconomic framework. Section 1 sets out the basics, as they apply in the WIDER studies. Section 2 takes up three theories about the fiscal deficit — it may rise for political or structural reasons, or perhaps because the relevant authorities want to maximize revenue from the inflation tax. Section 3 is about the effects of deficit reduction, a central component of orthodox stabilization packages. Section 4 takes up other fiscal topics brought up in the WIDER country papers. Brief conclusions appear in Section 5.