Budget Deficits and Economic Activity in Asia

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The growth and persistence of government budget deficits are a cause of increasing concern in both developed and developing countries. This situation has provoked extreme responses: some economists believe that they have devastating effects, while others maintain that they have no real impact at all. "Budget Deficits and Economic Activity in Asia" examines both of these claims in the context of the Asian economies. After testing for the feasibility of the current levels of budget deficits and therefore of the current fiscal policies, the study turns to a quantification of the effects on seigniorage, money supply, inflation, aggregate demand and interest rates. Ten countries including India, South Korea, Malaysia, Singapore, Taiwan and Thailand are studied. The author finds that budget deficits are monetized to a considerable extent, thus impairing or at least reducing the ability of the monetary authority to pursue expenditures in most of the countries covered. The author partially supports the widespread view that budget deficits are inflationary because they increase the money supply. He gives more emphasis to the apparent effects on interest rates, and finds these to be positive. As the processes of fiscal deregulation accelerate, interest rates seem set to become even more sensitive to the behavior of budget deficits.