Transmission of the Effects of the Fiscal Deficit in Industrial Countries to the Fiscal Deficit of the Developing Countries

International Monetary Fund

No 1988/046, IMF Working Papers from International Monetary Fund

Abstract: The paper shows that an increase in the aggregate fiscal deficit of the industrial countries may worsen the economic growth and fiscal balance of the developing countries that are burdened with external debt and facing current account constraints. The discussion is based on theoretical analysis and simulation exercises highlighting the relevant transmission mechanisms involved. Simulations show that higher fiscal deficits and interest rates in the industrial countries can explain some of the fiscal deterioration in the developing countries during the early 1980s, and the medium-term costs to the developing countries may be partly mitigated through flexible domestic economic policies.

Keywords: WP; terms of trade; interest payment; fiscal deficit; current account constraint; lowering developing country export; debt service; Government debt management; Real interest rates; Interest payments; Current account; Global (search for similar items in EconPapers)
Pages: 48
Date: 1988-01-01
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