Budgetary Disequilibrium and the Monetary Role of the Government Budget: Deficit Financing in the Netherlands

Abstract

This paper studies the choice between debt and money financing of government deficits in the Netherlands. The inference is based on an econometric model for the deficit financing strategy of the 1960s. Against the background of this model, it is shown that the financing strategy breaks down in the 1970s and that this breakdown may have been related to rising budgetary disequilibrium. Short-term policy flexibility requires that deviations of budget variables from their long-run equilibrium paths be limited and controlled. If disequilibrium rises to excessive proportions, as it did in the 1970s, then countercyclical policies may be overshadowed by disequilibrium feedback or even be abandoned altogether.