This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards the 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending. The magnitude of the effect is also economically significant: the effect of 1 percent of GDP increase (decrease) in spending (revenue) is comparable to an exogenous decline in the federal funds rate. We also find that fiscal shocks tend to have larger effects during periods of recessions than expansions in the source country, and that the adverse effect of a fiscal consolidation is larger than the positive effect of the same size of a fiscal expansion. In contrast, we do not find systematic and statistically significant differences in the spillover effects across recipient countries depending on their exchange rate regime, although capital controls seem to play some moderating role. The extension of the analysis to a panel of 16 small open economies confirms the finding from the U.S. economy.
This 2009 Article IV Consultation highlights that Poland’s rapid growth had begun to lose steam even before the global crisis hit. Following robust and relatively well-balanced expansion, driven by an EU accession-related investment boom and rapid credit and wage growth, economic activity began to slow down in the face of capacity constraints. Executive Directors have noted that a significant deceleration in economic activity is under way, reflecting adverse spillovers through real and financial channels. They have also commended the authorities for the timely, well-focused, and measured policy response.
Pakistan’s authorities have requested a 23-month Stand-By Arrangement for SDR 5.169 billion in support of their macroeconomic stabilization program. The authorities’ program envisages a tightening of fiscal and monetary policies to bring down inflation and reduce the external current account deficit to more sustainable levels. The pace of adjustment seeks to balance the need to address the current macroeconomic imbalances with protecting social stability. The program envisages important reforms in tax policy and administration and public financial management.
The current account deficit by the Central Bank of Bosnia and Herzegovina in recent years has fluctuated to about 20 percent of GDP. But official current account statistics suffer from several shortcomings. Possible sources of the savings required to achieve a fiscal position consistent with long-term fiscal sustainability is discussed. A theoretical model of the trade balance has been developed and used as the basis for estimating a quarterly regression model of Bosnia and Herzegovina’s trade balance. Effective fiscal coordination is essential in Bosnia and Herzegovina.
This 2005 Article IV Consultation highlights that macroeconomic imbalances in Serbia and Montenegro widened in 2004, putting at risk some of the impressive earlier achievements. Growth, about 5 percent in nonagriculture since 2002, has been fueled by a surge in domestic demand. Lack of competitive domestic production has led to increased imports and a widening current account deficit. The main policy challenge is to maintain macroeconomic stability while accelerating structural reform. Fiscal policy needs to be tightened substantially, and its flexibility increased by reducing the large share of nondiscretionary spending.
Bulgaria’s First Review Under the Stand-By Arrangement and Request for Waiver of Performance Criteria are discussed. With macroeconomic conditions expected to remain favorable, competitiveness at an adequate level, and a lower current account deficit, concerns about external vulnerability have lessened somewhat. Nonetheless, policies must remain prudent, and the program for 2005 envisages some fiscal easing, a slowdown in credit expansion, and reinvigorated structural reforms. The authorities have agreed to tighten the fiscal stance at the time of the second review if external current account developments are weaker than expected.
This 2004 Article IV Consultation highlights that impressive growth continued unabated in Lithuania in 2004. GDP expanded by an estimated 6¾ percent in 2004, driven by vigorous private consumption and investment growth. The unemployment rate declined to 10½ percent of the labor force but bottlenecks have developed in certain sectors, exacerbated by migration flows to the European Union (EU) and the United States. Structural reforms continued in 2004, but deeper reforms remain necessary to keep Lithuania on a real convergence path with the EU.
Bulgaria’s request for a 25-month precautionary Stand-By Arrangement (SBA) in an amount of SDR 100 million or 15.62 percent of quota is discussed. The SBA-supported program seeks to reduce increased external vulnerability and to achieve sustainable high growth through a tighter fiscal policy and measures to drain bank liquidity to reduce excess demand in the short term and structural reforms to boost output and export capacity in the medium term.
This 2002 Article IV Consultation highlights that the fiscal deficit of the Republic of Poland widened sharply in 2001, reflecting both automatic stabilizers and a ½ percent increase in the structural deficit. State (central government) primary expenditures (excluding one-off transfers) rose relative to GDP by 1 percentage point, notwithstanding cutbacks late in the year. Two factors accounted for this rise: significant increases in transfers and subsidies to households, agricultural and state enterprises, as well as wages; and outcomes for inflation and growth that were far below budget projections.