Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies

Publication Date:

June 21, 2013

Electronic Access:

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Summary:

This paper investigates how developments during and after the 2008–09 crisis have changed economists’ and policymakers’ views on: (i) fiscal risks and fiscal sustainability; (ii) the effectiveness of fiscal policy as a countercyclical tool; (iii) the appropriate design of fiscal adjustment programs; and (iv) the role of fiscal institutions.

Advanced economies have experienced much larger shocks than was previously thought possible and sovereign-bank feedback loops have amplified sovereign debt crises. This has led to reassessing what constitutes “safe” sovereign debt levels for advanced economies and has prompted a more risk-based approach to analyzing debt sustainability. Precrisis views about the interaction between monetary and fiscal policy have also been challenged by the surge in central bank purchases of government debt. This has helped restore financial market functioning, but, to minimize the risk of fiscal dominance, it is critical that central bank support is a complement to, not a substitute for, fiscal adjustment.

Series:

Policy Papers

Subject:

English

Publication Date:

June 21, 2013

Price:

Free

Format:

Paper

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