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Macroeconomic context and fiscal policy : Europe and Central Asia during 2000-2012

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  • Islam, Roumeen
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    Abstract

    This paper examines the interaction between fiscal policy and the broader macroeconomic context in open economies. It asks two questions. First, what was the relationship between fiscal policy and current account balances in countries in Europe and Central Asia during the past dozen years? Second, how might changes in (a) output composition and (b) financial sector profitability affect revenues and thus, the assessment of the underlying structural fiscal balance? The study finds that, for flexible exchange rate countries, expansionary fiscal policy has been associated with wider current account deficits. Moreover, changes in net exports and in financial sector profitability may have significant impacts on fiscal balances because of changes in revenues from the value-added tax and the corporate profits tax as a share of gross domestic product. These findings suggest that the countries of Europe and Central Asia have reason to be prudent in terms of fiscal policy choices, even as gross domestic product rises.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6621.

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    Date of creation: 01 Sep 2013
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    Handle: RePEc:wbk:wbrwps:6621

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    Keywords: Debt Markets; Economic Theory&Research; Currencies and Exchange Rates; Emerging Markets; Access to Finance;

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    1. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 19(2), pages 255-271, April.
    2. Kearney, Colm & Monadjemi, Mehdi, 1990. "Fiscal policy and current account performance: International evidence on the twin deficits," Journal of Macroeconomics, Elsevier, Elsevier, vol. 12(2), pages 197-219.
    3. Menzie D. Chinn & Hiro Ito, 2005. "Current Account Balances, Financial Development and Institutions: Assaying the World "Savings Glut"," NBER Working Papers 11761, National Bureau of Economic Research, Inc.
    4. European Commission, 2010. "Financial Sector Taxation," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 25, Directorate General Taxation and Customs Union, European Commission.
    5. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
    6. Alberto Alesina & Silvia Ardagna, 2010. "Large Changes in Fiscal Policy: Taxes versus Spending," NBER Chapters, in: Tax Policy and the Economy, Volume 24, pages 35-68 National Bureau of Economic Research, Inc.
    7. Forni, Lorenzo & Monteforte, Libero & Sessa, Luca, 2009. "The general equilibrium effects of fiscal policy: Estimates for the Euro area," Journal of Public Economics, Elsevier, Elsevier, vol. 93(3-4), pages 559-585, April.
    8. Ferhan Salman & Gabriela Dobrescu, 2011. "Fiscal Policy During Absorption Cycles," IMF Working Papers 11/41, International Monetary Fund.
    9. Giancarlo Corsetti & Gernot J. Müller, 2006. "Twin deficits: squaring theory, evidence and common sense," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 21(48), pages 597-638, October.
    10. Kun Li & Pablo Lopez Murphy, 2010. "Tax Revenue Downturns," IMF Working Papers 10/138, International Monetary Fund.
    11. John Bluedorn & Daniel Leigh, 2011. "Revisiting the Twin Deficits Hypothesis: The Effect of Fiscal Consolidation on the Current Account," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 59(4), pages 582-602, November.
    12. Jesmin Rahman, 2010. "Absorption Boom and Fiscal Stance," IMF Working Papers 10/97, International Monetary Fund.
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