Abstract
Fiscal problems are widely recognized as a key factor behind persistent inflation in Eastern Europe post-1989. Deficits need to be cut back, but how much for a given inflation target? We develop a simple framework on debt, deficit and inflation to study the fiscal and monetary policy interactions for the Romanian economy. This framework is employed to assess consistency between inflation, monetary reform and fiscal policy in Romania. First, the direct impact of inflation on fiscal inconsistency measure is assessed. A discussion on the importance of consolidating public sector deficit and its implications for a correct assessment of consistency between monetary and fiscal policy follows. Next, we discuss the implications of exchange rate policy on fiscal sustainability. Finally we alter debt dynamic process to simulate the impact of delaying fiscal adjustment on fiscal sustainability.
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