Fiscal Balance During Inflation, Disinflation, and Immigration: Policy Lessons

IMF Working Papers, April 1, 1996

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Fiscal Balance During Inflation, Disinflation, and Immigration: Policy Lessons

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Bibliographic details

• Authors: Assaf Razin, Efraim Sadka
• Published: April 1, 1996
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451979312.001

Summary

• The paper provides an overview of the role of fiscal imbalances and the ensuing public debt in explaining major episodes in Israel’s recent economic developments.
• The authors present conclusions from Israeli budgetary developments that may have broader applicability.

Major findings

• Deficits lead to inflation.
• Stopping inflation requires elimination of deficits.
• A major effect of inflation is a large shift of the tax burden from capital to labor.
• Shocks to labor supply, such as massive labor inflow through immigration, can be absorbed without worsening government finances when the labor and the housing markets are sufficiently flexible.

Policy implications and lessons

• Fiscal consolidation (eliminating deficits) is central to successful disinflation.
• Tax incidence shifts during high inflation—policy should account for redistribution of tax burden from capital to labor.
• Labor- and housing-market flexibility can mitigate fiscal pressures from large immigration inflows, implying structural reforms in these markets can preserve fiscal stability.

Subjects and keywords (as stated by the authors)

• Subjects: Government debt management, Income, Inflation, National accounts, Prices, Public debt, Public financial management (PFM), Tax incidence, Tax policy
• Keywords: deficit, disinflation, disinflation program, exchange rate, Government debt management, government savings, high-inflation period, Income, Inflation, inflation expectation, inflation path, inflation process, inflation stabilization, nominal capital, nominal rate, real rate of interest, stopping inflation, Tax incidence, tax liability, WP

Source: Fiscal Balance During Inflation, Disinflation, and Immigration: Policy Lessons, By Assaf Razin and Efraim Sadka, IMF Working Papers 1996, 033.