Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies
June 21, 2013
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Summary
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.
Subject: Developed countries, Financial crisis, Fiscal policy, Fiscal risk, Global Financial Crisis 2008-2009, Risk management
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