The impact of inflation on budgetary discipline

This paper views the budgetary process as a limited contingencies contract between the Treasury and the ministers, allowing a minister to ask for budg et revisions. Upon costly verification by the Treasury, the minister may ob tain extra funds. For significant state verification costs and for low vola tility, the contract is non-contingent. For volatility significant enough, the contract becomes state-contingent - it reduces the initial allocation, and reduces the threshold associated with budgetary revisions. In volatile economics, the projected revenue understates the realized budget, and the a verage budget error is positive. The model's predictions are confirmed usin g data from Latin America. (C) 2000 Elsevier Science B.V. All rights reserv ed. JEL classification: O23; E31.