The Macroeconomic Framework for Managing Public Finances

Abstract

This chapter is about the macroeconomic analysis of fiscal policy, or macrofiscal analysis, which is concerned with how fiscal policy affects macroeconomic outcomes and how macroeconomic considerations influence fiscal policy choices. Much that is written about this subject may seem somewhat divorced from what most PFM practitioners do in their everyday work, be it as PFM advisors or government officials with PFM responsibilities. However, while the core of this chapter is about traditional macrofiscal topics — the macroeconomic consequences of fiscal deficits, debt sustainability, fiscal targeting and adjustment, countercyclical fiscal policy, approaches to promoting fiscal discipline — it both begins and ends by discussing the important ways in which macrofiscal analysis and PFM interact. This does not mean that PFM practitioners have to master all the issues discussed below, but they need to be aware of these interactions so that PFM can be placed in its proper macroeconomic and fiscal policy context.