Glossary

austerity
A policy where a government tries to improve its budgetary position in a recession by increasing its saving.
autonomous fiscal council
A nonpartisan, fiscal watchdog providing the government with independent estimates of the public finances and their sustainability.
bond
A type of financial asset for which the issuer promises to pay a given amount over time to the holder. Also known as: corporate bonds.
causality
A direction from cause to effect, establishing that a change in one variable produces a change in another. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept.
countercyclical
Tending to move in the opposite direction to aggregate output and employment over the business cycle.
debt securities
Another, equivalent way to refer to bonds. See also: bonds.
disposable income
Income available after paying taxes and receiving transfers from the government.
Fisher equation
The relation that gives the real interest rate as the difference between the nominal interest rate and expected inflation: real interest rate = nominal interest rate – expected inflation.
flow
A quantity measured per unit of time, such as annual income or hourly wage.
free ride
Benefiting from the contributions of others to some cooperative project without contributing oneself.
government budget deficit
When the government budget balance is negative.
government debt
The total amount of money owed by the government at a specific point in time.
gross domestic product (GDP)
A measure of the market value of the output of final goods and services in the economy in a given period. Output of intermediate goods that are inputs to final production is excluded to prevent double counting.
inflation
An increase in the general price level in the economy. Usually measured over a year.
insolvent
When the value of an entity’s assets is less than the value of its liabilities.
interest rate
The price of bringing some buying power forward in time.
liquidity
Ease of buying or selling a financial asset at a predictable price.
primary deficit
The government deficit (its revenue minus its expenditure) excluding interest payments on its debt. See also: government debt.
real interest rate
The interest rate corrected for inflation (that is, the nominal interest rate minus the rate of inflation). It represents how many goods in the future one gets for the goods not consumed now.
stock
A quantity measured at a point in time. Its units do not depend on time. See also: flow.
tax smoothing logic
A large increase in taxation to fund an unanticipated increase in government spending (such as for a war or pandemic) leads to tax avoidance and other behavioral responses that reduce the economy’s output and distort the allocation of resources. It is preferable to spread out the tax increases and borrow to fund the expenditure.