Some monetary implications for public debt management in the Caribbean

Author(s): Boamah, Daniel; Greenidge, Kevin (2001)

Created 22 Jul, 2001
Categories Working Papers
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It is increasingly recognized that sound fiscal policy is crucial to the achievement of macroeconomic stability, an important prerequisite for sustained economic growth. In order to combat chronic unemployment, most governments, since the end of World War II, have departed from the idea of achieving a balanced budget over the business cycle and have instead adopted a policy of continuing fiscal deficits. This policy has largely been responsible for the steady build-up of national debt over time. To ensure a sustainable level of national debt that would not adversely affect macroeconomic stability, the literature usually favours keeping a fiscal deficit to GDP ratio in the neighborhood of 3% of GDP on average, although many developing countries have recorded deficits in excess of 10% of GDP. Financing relatively large deficits usually pose problems because more often than not, heavy reliance is placed on central banks to monetize the deficit. The monetisation of the deficits by the central bank may not only raise public debt relative to a non-accommodating policy but also have grave implications for money growth, inflation and ultimately economic growth. The pressure for monetary accommodation to monetize fiscal deficits is more prevalent in developing countries where alternative arrangements for financing the deficit are limited. This paper aims to examine the possible link between government debt and money growth and inflation for a number of Caribbean countries (Barbados, Guyana and Jamaica), emphasizing the impact of different methods of financing on the monetary base.

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