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In order to describe the path followed by major macroeconomic variable around the time of crises, this chapter examines some dynamic models. It thus shows how the dynamic adjustment path of the economy associated with exchange rate based stabilization plan can be linked to currency crisis. How expected changes in future government's policies can affect the timing of attacks. How a run on central bank's foreign reserves can emerge in a context of consistent and flexible policy rules. How policymakers can elude speculative attacks by introducing uncertainty into the speculators' decisions. That the domestic currency often stays overvalued for a long period. That large discrete devaluations occur after the peg is abandoned. That the domestic interest rates tend to rise in the run up to the crisis. That speculative runs often occur in a multi-period context giving rise to alternating phases of “tranquillity” and “distress”. That asset price dynamics plays a critical role in triggering a full-blown financial crisis.

This chapter examines the problem of inflation in Germany. In 1914 the German government based its war finance program on the assumption that World War I would be short. No additional taxation was introduced. Loans were considered sufficient to cover the total war expenses. The government obtained the necessary cash by discounting treasury notes with the Reichsbank which, in turn, sold these notes to banks and large business firms. Every six months loans were floated to redeem the treasury notes. The chapter begins with a discussion of Germany's war financing during the period 1914–1924, focusing on the post-war budget deficit and reestablishment of free prices, depreciation of the mark, and stabilization of the currency. It then considers Nazi Germany's finances during the period 1933–1943, along with the inflation problem after the defeat of Germany in World War II.

This book investigates the fiscal crisis being experienced by Japan, focusing on the Ministry of Finance (MOF) and its central budgetary system in the last quarter of the 20th century. It examines the MOF's functions and roles, as well as its relationships with the Spending Ministries and Agencies and the Liberal Democratic Party, in the performance of the core activity of government—deciding how much to spend and on what. It shows how budgets were made, and by whom, situated within the historical contexts of the evolution and development of the economy, the polity, and the administration. It deals mainly with the two central government budgets: the General Account Budget, and the Fiscal Investment and Loan Programme (FILP), the so-called ‘second budget’. Its main concern is with the processes that determined the amount and distribution of public spending, and with the consequential budget deficits and debts to which they gave rise. The book focuses on the pre-Diet stages of budget planning, formulation, and allocation.

This chapter analyzes the relationship between growth and the cyclicality of the budget deficit using yearly panel data on OECD countries. It shows that the budget deficit has become increasingly countercyclical in most OECD countries over the past twenty years, but this trend has been significantly less pronounced in the European Monetary Union (EMU). Within countries, a more countercyclical budgetary policy is positively associated with a higher level of financial development, a lower level of openness, and the adoption of an inflation targeting regime. A more countercyclical budgetary policy has a greater positive impact on growth when financial development is lower.

The issue is discussed of how much fiscal union (fiscal discipline and coordination) is needed among member countries’ budgets to ensure European Monetary Union. Aspects of the question addressed include budget deficits and European monetary policy, the distributive problem, the functions of the European Central Bank (ECB), and the coordination of fiscal policies.

This chapter discusses the basic analytical framework of “first-generation” models of currency crises and their extensions to deal with important features of balance-of-payments crises such as alternative post-collapse regimes, capital control and borrowing constraints, interest rate defence policies, the interaction between bank solvency and currency stability, uncertainty about government policies, real effects of crises. The key implication of this approach is that a fixed exchange rate regime cannot survive the long-run inconsistency between monetary, fiscal, and exchange rate policies. Unnecessary domestic money growth leads to a persistent loss of reserves and ultimately to a speculative attack against the home currency that forces the government to switch out of the peg once reserves approach a minimum level. It also predicts that the attack will take place at the point where the shadow exchange rate (i.e., the rate that would prevail if the government diverted into a floating rate) equals the fixed peg.

This chapter discusses how much federal government deficits matter in the short, medium, and long terms. Large federal government deficits can be appropriate in some circumstances—such as in a recession, or indeed in the case of a temporary spending need such as fighting a war—and have adverse effects on the economy in other cases. When the economy is strong, the budget should be in a surplus. Although it is impossible to be precise about the exact length of the short term—a period over which a deficit does not matter if it is cushioning the economy against the worst effects of a business cycle downturn—it is clear that large deficits year after year are a matter for concern. They imply an ever-growing tax burden on future generations of taxpayers. The chapter argues that we should not just look at the absolute size of the deficit itself. It provides a framework to ascertain more clearly whether we should or should not be worried about the size of the deficit.

This chapter shows that the determinants of Italian public deficits have remained by and large the same as before the Maastricht Treaty, but that the way in which fiscal policy reacts to each of these determinants has changed considerably since the treaty was signed. Institutional constraints, be they internal, such as the budget approbation rules, or external, like the Maastricht Treaty, have always been the main condition for Italian public finances to be in equilibrium. The analysis also suggests that the sensitivity of Italian budget deficits to these institutional constraints has increased since 1991. The recent weakening of the Stability and Growth Pact is therefore not good news for the sustainability of Italian public finances.

The Korean government has maintained a strong fiscal discipline since the early 1980s, keeping its budget more or less in balance and its debt at low levels. The fiscal balance showed large deficits after the economic crisis of 1997, but returned to surplus in 2000 thanks to the buoyant economy and the resumed consolidation efforts. The surplus has continued since then. Fiscal soundness is a characteristic common to many East Asian countries. Little has been known, however, about the working mechanism of fiscal policies in these countries. Korea is an interesting case in this regard because there is an indication that its fiscal discipline, which was firmly established under the authoritarian government of the early 1980s, is weakening these days with the democratization of Korean politics. This chapter reviews the development of public finance in Korea since the 1970s and how the country addressed the persistent budget deficit. It discusses the country's economic crisis and ballooning budget deficit, explains the Korean fiscal management system, outlines the recent reform efforts, and proposes ways to improve on these economic reforms.

This chapter focuses on the enactment of Clinton’s landmark economic plan in 1993. The early economic policy decisions and the battle for the 1993 budget set the stage for economic policy making for the rest of the Clinton administration. The budget bill also had a number of important consequences, both political and economic. The bitter partisan fight over the 1993 budget led to a split among Democrats about whether to strike a deal with the Republicans in 1997 to balance the budget. On the other hand, the full economic consequences of the 1993 budget bill took longer to be felt than did its political effects. But over time, Clinton’s team began to see actual reduction of the budget deficit.

This chapter examines the financial status of the U.S. banking sector in early 2009 by considering the ongoing debates from five perspectives. The first argument holds that banks around the country failed to extend loans to small and medium businesses that could provide job opportunities to the unemployed. The second argues that the federal budget deficit posed a staggering challenge of bringing the deficit under control soon enough. The third claims that the monetary policy of the Federal Reserve has become more or less steadfast and easy. The fourth monitors the recovery of the U.S. real gross domestic product (GDP). The fifth perspective projects the uncertainties faced by the U.S. economy at the time of the rise of unemployment benefits, decline in home sales, and slow-paced manufacturing activities.

This chapter examines the legislative attacks on the public sector aimed at eliminating employee union rights and slashing public services. Corporate lobbies and their legislative allies saw the 2010 elections as an opportunity to restructure labor relations, political power, and the size of government. With no guarantee that their dominance would last into the future, the 2011–2012 legislatures were driven by an urgency to pursue ambitious reforms while it was politically feasible. The chapter analyzes the extent of this legislative offensive as well as its underlying motives and ultimate objectives. It also asks why large, private corporations would spend significant time, money, and energy fighting public employee unions in Wisconsin or Ohio, and whether public employees are to blame for state budget deficits. Finally, it discusses the political and economic impacts of antiunionism and who benefited from cutting public employee compensation and pensions.

This chapter discusses the weakening of the leasehold empire of the U.S. during the mid-1980s. Analysts consider the gradual erosion of the exceptional position occupied by the U.S. since 1945 as inevitable, but it was compounded the actions taken by the administration of President Ronald Reagan to face down the Soviet threat. During this period, the U.S. defence budget was increased by $1 trillion and it has accumulated foreign debt of $3 million. In addition to this, the annual trade deficit increased from $30 to $130 billion and the federal budget deficit rose from $60 to $200 billion.

The convent experienced a budget deficit, and shortly after a period of growth, when some of the initial conflicts had been resolved. Although this issue may have been brought about by failings of the vida común, most of the blame went to the nuns and some of the loan policies and investments made by the church. This financial crisis became enough reason for Bishop Antonio de San Miguel to move that the vida común be replaced with vida particular, or the individual life, which opposed the convent's constitution, and wherein individual monthly allowances would be given to the nuns for purchasing food and other necessities. This chapter discusses the recruitment problem of the convent, the different aspects of the financial crisis and how this affected recruitment, the attempts made to resolve the financial problem, the decision to enforce vida particular, and how the convent adjusted, if it did, to this new arrangement.

This chapter considers the evidence supporting the conventional wisdom that deficit-reducing policies lead to electoral losses for fiscally conservative governments. It focuses on large fiscal adjustments, which are currently the center of attention in many Organization for Economic Cooperation and Development (OECD) countries, and shows that there is no evidence that governments which reduce budget deficits even decisively are systematically voted out of office. In some cases they are, in some (more often) they are not. A commentary is also included at the end of the chapter.

This chapter argues that the deindustrialization of America is to blame for the soaring federal deficit. The reason: the need for large infusions of foreign savings to finance government borrowing sent the dollar higher and made it much harder for U.S. manufacturers to export their goods overseas. The United States government the world's champion borrower in international capital markets and foreigners are buying Treasury bonds in place of exports of American goods and services. This matters, not least because of the damaging effects on employment and the political consequences. The chapter concludes that the federal budget deficit has been too big for too long and now urgently needs correcting.

Especially since passage of the Employment Act of 1946, American presidents have used the federal budget to promote economic growth. They frequently raised or lowered taxes to stimulate or curtail investment. Thus, the creation of budget deficits and surpluses became major tools for presidents in their stewardship of the U.S. economy.