Budget Deficits, Business Cycles and Macroeconomic Policies

Melbourne Institute Policy Brief No. 05/13

Date: 2013


Guay Lim
Edda Claus
Viet Hoang Nguyen
Michael Chua


This article is concerned with three macroeconomic issues associated with budget deficits. First, budget deficits with an international dimension can compound the problem of debt service as foreigners factor in risk margins to compensate for exchange rate risk and country risk. Second, budget deficits and surpluses are highly correlated with business cycles and they have an important role to play in stabilising the state of the economy. Third, budget deficits are reflections of fiscal policy decisions about taxes and expenditures and, as such, the implications of the fiscal arm of the government need to be consistent with the monetary arm of policy.

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