Macroeconomic Context and Fiscal Policy Design : Europe and Central Asia during 2000–2012

This paper examines the interaction between fiscal policy and the broader macroeconomic context in open economies. It asks two questions. First, what was the relationship between fiscal policy and current account balances in countries in Europe and Central Asia during the past dozen years? Second, h...

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Bibliographic Details
Main Author:	Islam, Roumeen
Format:	Policy Research Working Paper
Language:	en_US
Published:	World Bank, Washington, D.C. 2013
Subjects:	Accounting accumulation of debt actual values advanced countries advanced economies aggregate demand ARIMA budget deficits business cycle capital flight capital flow capital flows capital inflows capital outflows commercial banks commodity commodity prices consolidation consumption demand control variable corporate income taxes corporate profits corporate tax Corporate Taxes country fixed effects credit default credit default swaps credit markets creditworthiness current account current account balance current account balances current account deficit current account deficits Current Account Dynamics Current accounts cyclical fluctuations debt crisis debt ratios dependent variable deposit deposit money banks developing countries development policy domestic demand domestic financial sectors dummy variable economic crisis Economic Policy elasticity emerging economies emerging market emerging markets equilibrium prices equity markets Exchange Rate Arrangements exchange rate regime expansionary fiscal policy expenditure expenditure increases explanatory variable explanatory variables export earnings export ratio export share exporters external balances external borrowing external debt external debts external deficit external deficits external financing financial assets financial crisis Financial Development financial flows financial market financial markets financial openness financial sector financial stress financial system fiscal balance fiscal balances fiscal consolidation fiscal deficit fiscal deficits fiscal policies Fiscal Policy fixed effects fixed exchange rate fixed exchange rate countries fixed exchange rate regime fixed exchange rate system fixed exchange rate systems fixed exchange rates flexible exchange rate flexible exchange rate countries flexible exchange rates flexible rates forecasts Foreign Asset foreign assets foreign debt foreign liabilities GDP GDP per capita general equilibrium global capital global capital markets global financial markets global macroeconomic conditions global market global markets government accounts government budget government expenditures gross domestic product Growth rate imbalances import import demand imports income tax income taxes indebted countries indebtedness industrial countries instrument interest payments interest rate interest rates International Bank International Debt international financial market international market international markets International Money investor confidence lenders local currency long run equilibrium low interest rates low-income countries macroeconomic conditions Macroeconomic Context Macroeconomic Effects Macroeconomic Policies macroeconomic variables Macroeconomics market conditions market risk monetary authorities Monetary Fund monetary policies net exports oil exporters oil exporting countries oil revenues open economies open economy optimization output gap output gaps output responses outturns per capita income personal income positive coefficient potential output Poverty Reduction private capital private capital flows profitability public finances public savings push factors Rate of Return real exchange rate real exchange rate appreciation real GDP recession recessions regression analysis return Return on Asset return on assets returns risk averse short-term fluctuations sovereign debt tax tax collection tax revenues tax structures tax systems Taxation trade balance trade balances Trade growth trade integration trade openness transaction unemployment value added volatility weights World Development Indicators world interest rate
Online Access:	http://hdl.handle.net/10986/16315

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Summary:	This paper examines the interaction between fiscal policy and the broader macroeconomic context in open economies. It asks two questions. First, what was the relationship between fiscal policy and current account balances in countries in Europe and Central Asia during the past dozen years? Second, how might changes in (a) output composition and (b) financial sector profitability affect revenues and thus, the assessment of the underlying structural fiscal balance? The study finds that, for flexible exchange rate countries, expansionary fiscal policy has been associated with wider current account deficits. Moreover, changes in net exports and in financial sector profitability may have significant impacts on fiscal balances because of changes in revenues from the value-added tax and the corporate profits tax as a share of gross domestic product. These findings suggest that the countries of Europe and Central Asia have reason to be prudent in terms of fiscal policy choices, even as gross domestic product rises.

Macroeconomic Context and Fiscal Policy Design : Europe and Central Asia during 2000–2012

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