Fiscal Adjustment, Financial Liberalization, and the Dynamics of Inflation: Some Evidence from Zambia.

Journal article

The liberalization of foreign exchange and domestic asset markets imposes fiscal costs on governments which are net purchasers of foreign currency from the private sector and net borrowers from the financial system. Fiscal costs increase if liberalization also induces the private sector to reduce domestic money balances in favor of foreign currency and domestic interest-bearing assets. The substitution out of domestic money reduces seigniorage revenue accruing to government and, unless offsetting fiscal adjustment can be made, will often lead to accelerating inflation. This paper presents a model of inflation and financial liberalization applied to recent stabilization experiences in Zambia to illustrate the fiscal and inflationary consequences of financial liberalization implemented prior to the achievement of fiscal balance.

Authors: Adam, C

• Journal: World Development
• Volume: 23
• Publication date: 1995-01-01
• ISSN: 0305-750X