FISCAL POLICY PROBLEMS UNDER CONDITIONS OF FINANCIAL LIBERALIZATION

Financial Liberalization and Policy Challenges

Fiscal Policy and Financial Markets*

We examine the effect of fiscal policy on sovereign risk spreads and investigate whether the interaction of fiscal variables with political institutions affect financial markets. Using panel data from emerging market countries, we find that revenue-based adjustment lowers spreads more than spending-based adjustment. Financial markets also react to the composition of spending. Cuts in current sp...

Fiscal policy, banks and the financial crisis

This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in the macroeconomics literature. We use the estimated model to analyze the effects of bank asset losses, ...

Fiscal policy under loose commitment

Due to time-inconsistency or political turnover, policymakers’ promises are not always fulfilled. We analyze an optimal fiscal policy problem where the plans made by the benevolent government are periodically revised. In this loose commitment setting, the properties of labor and capital income taxes are significantly different than under the full-commitment and no-commitment assumptions. Becaus...

Financial Liberalization

Financial liberalization has led to financial deepening and higher growth in several countries. However, it has also led to a greater incidence of financial crises. Here, we review the empirical evidence on these dual effects of financial liberalization across different groups of countries. We then present a conceptual framework that explains why there is a trade-off between growth and incidenc...