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Using Financial Market Information to Enhance Canadian Fiscal Policy

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Author Info

  • Huw Lloyd-Ellis

    ()
    (Queen's University)

  • Xiaodong Zhu

    ()
    (University of Toronto)

Abstract

In this article we argue that the evaluation and implementation of Canadian fiscal policy could be significantly improved through the systematic use of information provided by global financial markets. In particular, we show how the information contained in internationally traded asset returns can be used to (1) provide a more meaningful cyclical-adjustment of the budget deficit, (2) assess the sustainability of the public debt, and (3) reduce the risk of the debt becoming unsustainable without having to run excessively large surpluses.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1041.pdf
File Function: First version 2004
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1041.

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Length: 28 pages
Date of creation: Aug 2004
Date of revision:
Publication status: Forthcoming in Public Finance Management
Handle: RePEc:qed:wpaper:1041

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Keywords: Public debt; cyclically-adjusted deficit; sustainability; hedging;

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References

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  1. John Y. Campbell, 1995. "Understanding Risk and Return," Harvard Institute of Economic Research Working Papers 1711, Harvard - Institute of Economic Research.
  2. Nouriel Roubini & Jeffrey Sachs, 1988. "Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies," NBER Working Papers 2682, National Bureau of Economic Research, Inc.
  3. Duffie, Darrell, 1986. "Stochastic Equilibria: Existence, Spanning Number, and the 'No Expected Financial Gain from Trade' Hypothesis," Econometrica, Econometric Society, vol. 54(5), pages 1161-83, September.
  4. John Y. Campbell & Luis M. Viceira, 1998. "Who Should Buy Long-Term Bonds?," NBER Working Papers 6801, National Bureau of Economic Research, Inc.
  5. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  6. Alessandro Missale & Olivier Jean Blanchard, 1991. "The Debt Burden and Debt Maturity," NBER Working Papers 3944, National Bureau of Economic Research, Inc.
  7. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-88, December.
  8. Huw Lloyd-Ellis & Xiaodong Zhu, 2000. "Fiscal Shocks and Fiscal Risk Management," Cahiers de recherche CREFE / CREFE Working Papers 108, CREFE, Université du Québec à Montréal.
  9. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  11. Boothe, Paul & Reid, Bradford, 1992. "Debt Management Objectives for a Small Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 43-60, February.
  12. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  13. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
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