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Using Financial Market Information to Enhance Canadian Fiscal Policy

Author

Listed:
  • 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.

Suggested Citation

  • Huw Lloyd-Ellis & Xiaodong Zhu, 2004. "Using Financial Market Information to Enhance Canadian Fiscal Policy," Working Papers 1041, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1041
    as

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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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    References listed on IDEAS

    as
    1. 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.
    2. Missale, Alessandro & Blanchard, Olivier Jean, 1994. "The Debt Burden and Debt Maturity," American Economic Review, American Economic Association, vol. 84(1), pages 309-319, March.
    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. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
    5. 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.
    6. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    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. 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.
    9. LuisM. Viceira & John Y. Campbell, 2001. "Who Should Buy Long-Term Bonds?," American Economic Review, American Economic Association, vol. 91(1), pages 99-127, March.
    10. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    11. Duffie, Darrell, 1986. "Stochastic Equilibria: Existence, Spanning Number, and the 'No Expected Financial Gain from Trade' Hypothesis," Econometrica, Econometric Society, vol. 54(5), pages 1161-1183, September.
    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. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
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    More about this item

    Keywords

    Public debt; cyclically-adjusted deficit; sustainability; hedging;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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