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Derivatives, Fiscal Policy and Financial Stability


  • Oldani, Chiara
  • Savona, Paolo


The massive use of derivatives and securitisation by sovereign States for public debt and deficit management is a growing phenomenon in financial markets. Financial innovation can modify risks effectively run and alter the stability of the public sector finance. The experience of some developed and developing countries is surveyed to look at main instruments used and aims of public finance. Financial stability of the public sector is analysed considering financial innovation use. The case of Italy and its scarce disclosure of information are presented. An IS-LM model is used to capture the effect of financial innovation on fiscal policy for high indebted (European) industrialised countries, with deficit constraints, starting from Blanchard (1981). The use of financial innovation can have various effects over debt and deficit management, given binding external burden (like the European criteria) as far as risks are properly considered, expectations of fiscal policy are coherent with that of markets, and no exogenous shock occurs.

Suggested Citation

  • Oldani, Chiara & Savona, Paolo, 2005. "Derivatives, Fiscal Policy and Financial Stability," MPRA Paper 36199, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:36199

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    References listed on IDEAS

    1. Paolo Savona & Aurelio Maccario & Chiara Oldani, 2000. "On Monetary Analysis of Derivatives," Open Economies Review, Springer, vol. 11(1), pages 149-175, August.
    2. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-143, March.
    3. Jürgen Von Hagen & Ingo Fender, 1998. "Central Bank Policy in a More Perfect Financial System," Open Economies Review, Springer, vol. 9(1), pages 493-532, January.
    4. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, January.
    5. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 149-169, Spring.
    6. Paolo Savona & Carlo Viviani, 2004. "The Impact of the Stability and Growth Pact on Real Economic," Public Economics 0403003, EconWPA.
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    Cited by:

    1. Oldani, Chiara, 2011. "The Management of Greek Sovereign Risk," MPRA Paper 36195, University Library of Munich, Germany.
    2. Oldani, Chiara & Savona, Paolo, 2010. "Souvlaki connection; reflections on the Greek crisis," MPRA Paper 36197, University Library of Munich, Germany.

    More about this item


    fiscal policy; financial stability; derivatives and securitisation;

    JEL classification:

    • H8 - Public Economics - - Miscellaneous Issues
    • G2 - Financial Economics - - Financial Institutions and Services
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation


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