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Does the new fiscal consensus in advanced economies travel to emerging markets?

Author

Listed:
  • Olivier J Blanchard

    (Peterson Institute for International Economics)

  • Josh Felman

    (JH Consulting)

  • Arvind Subramanian

    (Peterson Institute for International Economics)

Abstract

A new consensus on fiscal policy has emerged in advanced economies, that stimulus is both needed and feasible. At first blush, the scope for stimulus seems even greater in emerging markets, since their primary deficits are smaller and interest-growth differentials more favorable, suggesting that they can sustain much higher levels of debt. But more careful analysis suggests that this is not the case. The authors point out that what matters for debt sustainability are not current conditions but rather the range of possible future outcomes. And prospects for interest rates and growth are more uncertain in emerging markets, while primary balances are more difficult to adjust. As a result, debt limits are in fact tighter than advanced economies. Taking India as a case study, the authors argue that what is needed in the current situation is responsible, slow fiscal adjustment. More generally, one should be careful about importing wholesale the new fiscal consensus into emerging markets.

Suggested Citation

  • Olivier J Blanchard & Josh Felman & Arvind Subramanian, 2021. "Does the new fiscal consensus in advanced economies travel to emerging markets?," Policy Briefs PB21-7, Peterson Institute for International Economics.
    • Handle: RePEc:iie:pbrief:pb21-7
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    Cited by:

    1. Carmen M. Reinhart & Franziska L. Ohnsorge & Kenneth S. Rogoff & M. Ayhan Kose, 2022. "The Aftermath of Debt Surges," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 637-663, August.
    2. Markus dup Brunnermeier & Kristin dup Forbes & Maurice Obstfeld, 2021. "Jackson Hole 2021 - Monetary Policy in an Uneven Economy (Panel)," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, August.
    3. Havemann, Roy & Hollander, Hylton, 2024. "Fiscal policy in times of fiscal stress (or what to do when r > g)," Journal of Policy Modeling, Elsevier, vol. 46(5), pages 1020-1054.
    4. Adam S. Posen, 2021. "Fiscal Success During COVID-19 Says Believe the Good News," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 56(4), pages 190-193, July.
    5. Ashima Goyal, 2021. "Using the snowball effect in Indian post Covid-19 paths to fiscal consolidation," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2021-016, Indira Gandhi Institute of Development Research, Mumbai, India.
    6. Gudmundsson, Tryggvi & Klyuev, Vladimir & Medina, Leandro & Nandwa, Boaz & Plotnikov, Dmitry & Schiffrer, Francisco & Yang, Di, 2022. "Emerging markets: Prospects and challenges," Journal of Policy Modeling, Elsevier, vol. 44(4), pages 827-841.

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