Fiscal Policy and Financial Markets

By Bernardin Akitoby, Thomas Stratmann. Social Science Research Network, 2008

177 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/126ca3247edfde81e563c78497d5f5cfd7df4b95

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Ricardo M. Sousa
2. Vítor Castro
3. Luca Agnello
4. S. Gupta
5. Anthony J. Venables
6. António Afonso
7. E. Baldacci
8. Paul Collier

In Finance

1. Vítor Castro
2. Ricardo M. Sousa
3. Luca Agnello
4. Paul Collier
5. E. Baldacci
6. Carlos Mulas-Granados
7. António Afonso
8. Anthony J. Venables

Citations in the corpus

• FISCAL POLICY AND ASSET PRICES (2013, unknown): “Similarly, scal policy measures may impact on sovereign risk spreads and nancial markets may also be in uenced by the interaction between scal variables and political institutions (Akitoby and Stratmann, 2008).”
• How Effective is Fiscal Policy Response in Systemic Banking Crises? (2009, background): “Ardagna (2009) shows that financial markets value fiscal discipline, since interest rates on long-term government bonds and stock market prices worsen considerably in periods of fiscal expansion.”
• What are the effects of fiscal policy on asset markets (2011, background): “For emerging markets, Akitoby and Stratmann (2008) examine the effect of fiscal policy on sovereign risk spreads, and show that adjustments based on the revenue side lower spreads more than spending-based ones. In addition, while debt-financed spending increases sovereign risk, a change in governmen”
• How does fiscal policy react to wealth composition and asset prices (2012, background): “Akitoby and Stratmann (2008) nd that, for emerging markets, scal adjustments based on the revenue side lower sovereign risk spreads more than spending-based ones.”
• Bond Yields in Emerging Economies: It Matters What State You are in (2012, unknown): “…and Packer, 1996; Edwards, 1984); fiscal variables, like fiscal debt and deficits (Cantor and Packer, 1996; Rowland and Torres, 2004) or their composition (Akitoby and Stratmann, 2008); and other macroeconomic variables like inflation, the terms of trade and the real exchange rate (Min, 1998).”
• Managing Resource Revenues in Developing Economies (2010, background): “Evidence on interest rate spreads (e.g., Akitoby and Stratmann, 2008) suggests that indebtedness raises the interest paid by countries, so the marginal value of paying down foreign debt may be large.”