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Fiscal sustainability and financial stability

In: CNB Financial Stability Report 2012/2013

Author

Listed:
  • Zlatuse Komarkova
  • Vilma Dingova
  • Lubos Komarek

Abstract

As the two-way interaction between the financial sector and the government sector grows, so does the dependence between financial stability and fiscal stability. The high creditworthiness of government debt represents both a significant source of certainty for the financial system and a solid basis for the pricing of assets through the supply of"risk-free" government bonds. Given the risk of a downward spiral developing between the two sectors, it is vital, in the interests of financial stability, to monitor fiscal stability in order to put a timely regulatory "block" on excessive interaction. This article illustrates that when assessing sovereign risk in the balance sheets of domestic financial institutions, one needs to consider the dependence of debt sustainability not only on the size of the debt in relation to GDP, but also on the macroeconomic conditions affecting interest rates and economic growth. The article then discusses current and newly proposed prudential policy tools suitable for reducing sovereign risk in financial institutions'balance sheets.

Suggested Citation

  • Zlatuse Komarkova & Vilma Dingova & Lubos Komarek, 2013. "Fiscal sustainability and financial stability," Occasional Publications - Chapters in Edited Volumes,in: CNB Financial Stability Report 2012/2013, chapter 0, pages 103-112 Czech National Bank.
  • Handle: RePEc:cnb:ocpubc:fsr1213/2
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    References listed on IDEAS

    as
    1. Jaejoon Woo & Manmohan S. Kumar, 2015. "Public Debt and Growth," Economica, London School of Economics and Political Science, vol. 82(328), pages 705-739, October.
    2. Kiichi Tokuoka, 2010. "The Outlook for Financing Japan's Public Debt," IMF Working Papers 10/19, International Monetary Fund.
    3. Eric M. Leeper, 2013. "Fiscal Limits and Monetary Policy," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 13(2), pages 33-58.
    4. Manmohan S. Kumar & Emanuele Baldacci, 2010. "Fiscal Deficits, Public Debt, and Sovereign Bond Yields," IMF Working Papers 10/184, International Monetary Fund.
    5. Markus Eller & Jarmila Urvová, 2012. "How Sustainable Are Public Debt Levels in Emerging Europe?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 48-79.
    6. Waikei R Lam & Kiichi Tokuoka, 2011. "Assessing the Risks to the Japanese Government Bond (JGB) Market," IMF Working Papers 11/292, International Monetary Fund.
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