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Using Financial Market Information to Enhance Canadian Fiscal Policy

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  • 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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  1. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  2. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
  3. Lloyd-Ellis, Huw & Zhu, Xiaodong, 2001. "Fiscal shocks and fiscal risk management," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 309-338, October.
  4. John Y. CAMPBELL & Luis VICEIRA, 1998. "Who Should Buy Long-Term Bonds?," FAME Research Paper Series rp5, International Center for Financial Asset Management and Engineering.
  5. 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.
  6. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  7. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  8. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  9. 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.
  10. 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.
  11. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  12. 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.
  13. Alessandro Missale & Olivier Jean Blanchard, 1991. "The Debt Burden and Debt Maturity," NBER Working Papers 3944, National Bureau of Economic Research, Inc.
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