Government Budget Constraint: Fiscal Policy and Pathologies

This chapter presents the government budget constraint and analyzes several issues based on this accounting framework. The first section shows that the government budget constraint results from the consolidation of the Treasury and Central Bank balance sheets. The second section presents the conditions for the public debt to be sustainable. The third section addresses the inflation tax and the various alternative ways to calculate its social cost. The fourth section covers various hyperinflation models. The fifth section presents the Ricardian equivalence theorem. The sixth section analyzes the conditions for a monetary regime to be sustainable. The seventh section introduces a model of tax smoothing.