DP468 Fiscal Deficits, Seigniorage and External Debt: The Case of Greece

Author(s): George Alogoskoufis, Nikos Christodoulakis
Publication Date: October 1990
Keyword(s): Greece, Inflation, Public and External Deficits and Debts, Seigniorage, Stabilization
JEL(s): 120, 320, 431
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=468

This paper investigates the relation between the rise in external debt and fiscal developments in Greece. We use an intertemporal model of optimal private-sector savings to argue that stabilization of the public debt/GDP ratio will be sufficient to stabilize the external debt/GDP ratio as well. Our results suggest that stabilization of the public debt/ GDP ratio at a given level through higher taxation will result in a higher external debt/GDP ratio than stabilization at the same level through a reduction in (non-interest) government expenditure. They also suggest that in the case of Greece there is no further scope for a steady-state increase in seigniorage revenue. In fact, the inflation rate slightly exceeds the seigniorage-maximizing rate. We calculate that if the public sector debt were to be stabilized at its current level of approximately 100% of GDP, the primary deficit (i.e., the deficit excluding interest payments) would have to fall to 0.3% of GDP from its projected ratio of 6.5% in 1990 and 5.1% in 1991.