Cover IMF Working Papers
Buy Book in Print
Fiscal Policy and Financial Markets
Author:
Mr. Bernardin Akitoby
Search for other papers by Mr. Bernardin Akitoby in
Current site
Google Scholar Close
and
Mr. Thomas Stratmann
Search for other papers by Mr. Thomas Stratmann in
Current site
Google Scholar Close
Series:
IMF Working Papers
Volume/Issue:
Volume 2006: Issue 016
Language:
English
Publication Date:
01 Jan 2006
DOI:
https://doi.org/10.5089/9781451862768.001
ISBN:
9781451862768
ISSN:
1018-5941
Pages:
26
Keywords:
WP; spread; debt; Fiscal policy; sovereign risk; spreads; bond markets; emerging markets; fiscal policy variable; short-term debt; sovereign spread; country spread; Arellano-bond estimate; financial markets treatment; borrowing cost; stripped spread; A. fiscal policy; short-run spread; inflation rate; stochastic model; Current spending; Fiscal consolidation; Inflation; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (239.5 KB) Download Epub
This paper introduces fiscal policy in a model of sovereign risk spreads ("spreads"). Using panel data from emerging market countries, we find that reductions in public expenditure are a more powerful tool for reducing spreads than increases in revenues. Specifically, cuts in current spending lower spreads by more than cuts in investment spending, and they also lower spreads by more than increases in revenue. We also show that debt-financed current spending increases sovereign risk by more than tax-financed current spending, suggesting that international investors have some preference for the latter. In line with the empirical literature on the determinants of spreads, we find that liquidity and solvency indicators, as well as macroeconomic fundamentals, are also important determinants of spreads.
  • Collapse
  • Expand
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund