The financing of government budget deficits, money supply and economic activity

Recent years have witnessed the affliction of recessionary conditions on advanced western economies. The subsequent effects of disrupted growth on output, low level of economic activity, and high levels of unemployment are shortfalls in taxation receipts and large reciprocatory increases in government expenditure. The result is the emergence of large budget deficits as governments attempt to spend their way out of recessions. The present scenery embodies another problem; the malaise of high levels of unemployment, that is accompanying high rates of inflation. The aim of this dissertation is to examine the impact of the size of the budget deficit and the financing of it on the levels of economic activity. Particular attention will be given to the impact on rate of inflation and to a lesser degree on other variables such as real output and unemployment. The structure of the dissertation will be centred on the following aspects: - the relevance of the size of the budget deficit. - the links between financing the budget deficit and the rate of growth of the money supply. - the links between the rate of growth of the money supply and the rate of inflation, rate of growth of real output and unemployment. This study will firstly concentrate on the theoretical issues, and an attempt will be made to apply the analysis to the recent experience of Australia, the United States and the United Kingdom. In Chapter 1 the theoretical development of government deficit spending financed by borrowing from the time of the classical economists to the Keynesian era will be presented. Chapter 2 will be concerned with the modern theoretical debate between the Monetarist and Keynesian schools over the inflationary effects stemming from the financing of government budget deficit spending. Chapter 3 will be specifically directed to the various means available to governments to finance deficits. The issue of contention will be whether and which method of financing added to the growth of the money supply and ultimately to inflationary pressures. Based on the theoretical analysis of Chapters 2 and 3, Chapter 4 will seek to examine by empirical evidence the above two relationships in three countries Australia, United States and United Kingdom; that is: (1} the connection between the financing of budget deficits and the rate of growth of the money supply. (2) the connection between the rate of growth of the money supply and the rate of inflation, rate of growth of real output and unemployment.