ABSTRACT
This chapter focuses on the many factors that could theoretically be expected to influence the relationship between budget deficits and inflation. It discusses some of the factors accounting for the development of large budget deficits. The chapter examines some conclusions regarding the prevalent deficit-inflation cycles among the less-developed economies of Latin America and discusses the role played by the institutional arrangements for monetary and fiscal policy. It describes the implications of the international evidence for the emerging market economies of Central and Eastern Europe. The Chilean and Mexican stabilizations both involved fiscal restraint that moved the budget into surplus. Budget deficit and inflation problems have, in varying degrees, plagued not only Russia but all the other former Iron Curtain countries. The intent of the institutional reforms in monetary policy in the former Communist countries nevertheless remains a positive sign. The phasing out of direct budget financing, if fully implemented, remains a potentially important step towards fiscal stringency in these economies.
