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On Keeping Your Powder Dry: Fiscal Foundations of Financial and Price Stability

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  • Maurice Obstfeld

    (University of California at Berkeley)

Abstract

Banking systems have rapidly grown to a point where, for many countries, bank assets amount to multiples of GDP. As a consequence, governments' capacities to provide stability-enhancing fiscal guarantees against systemic crises can no longer be taken for granted. As regulation of dynamic financial markets will inevitably be imperfect, prudent governments need to adjust other facets of macroeconomic policy to mitigate financial instability. A precautionary approach to fiscal policy, leading to moderate levels of public debt relative to GDP over the medium term, is essential for the credibility of government promises to support the financial system, as well as the broader economy.

Suggested Citation

  • Maurice Obstfeld, 2013. "On Keeping Your Powder Dry: Fiscal Foundations of Financial and Price Stability," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 31, pages 25-38, November.
  • Handle: RePEc:ime:imemes:v:31:y:2013:p:25-38
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    References listed on IDEAS

    as
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    Cited by:

    1. Bénétrix, Agustin S. & Lane, Philip R. & Shambaugh, Jay C., 2015. "International currency exposures, valuation effects and the global financial crisis," Journal of International Economics, Elsevier, vol. 96(S1), pages 98-109.
    2. Reinhart, Carmen M. & Reinhart, Vincent & Rogoff, Kenneth, 2015. "Dealing with debt," Journal of International Economics, Elsevier, vol. 96(S1), pages 43-55.
    3. Dąbrowski, Marek A. & Śmiech, Sławomir & Papież, Monika, 2015. "Monetary policy options for mitigating the impact of the global financial crisis on emerging market economies," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 409-431.
    4. Enrique Alberola-Ila & Ricardo Sousa, 2017. "Assessing fiscal policy through the lens of the financial and the commodity price cycles," BIS Working Papers 638, Bank for International Settlements.
    5. Bernardo Maggi, 2015. "(Why) Is the Euro system intrinsically unstable?," DSS Empirical Economics and Econometrics Working Papers Series 2015/1, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
    6. Claudio Borio & Marco Jacopo Lombardi & Fabrizio Zampolli, 2016. "Fiscal sustainability and the financial cycle," BIS Working Papers 552, Bank for International Settlements.
    7. Kose, Ayhan & Ohnsorge, Franziska & Sugawara, Naotaka, 2020. "Benefits and Costs of Debt: The Dose Makes the Poison," CEPR Discussion Papers 14439, C.E.P.R. Discussion Papers.
    8. Christina D. Romer & David H. Romer, 2018. "Phillips Lecture – Why Some Times Are Different: Macroeconomic Policy and the Aftermath of Financial Crises," Economica, London School of Economics and Political Science, vol. 85(337), pages 1-40, January.

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    More about this item

    Keywords

    Fiscal policy; Financial stability; Monetary policy; Financial crisis; Banking crisis; Bank resolution;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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