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On Keeping Your Powder Dry: Fiscal Foundations of Financial and Price Stability

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  • Maurice Obstfeld

    (University of California, Berkeley, CEPR, and NBER (E-mail: obstfeld@econ.berkeley.edu))

Abstract

Banking systems have rapidly grown to a point where for many countries bank assets amount to multiples of GDP. As a consequence, government fs capacity to provide stability-enhancing fiscal guarantees against systemic crises can no longer be taken for granted. As regulation of dynamic financial markets will inevitably be imperfect, prudent governments need to adjust other facets of macroeconomic policy in order to mitigate financial instability. A precautionary approach to fiscal policy, leading to moderate levels of public debt relative to GDP over the medium term, is essential for the credibility of government promises to support the financial system, as well as the broader economy.

Suggested Citation

  • Maurice Obstfeld, 2013. "On Keeping Your Powder Dry: Fiscal Foundations of Financial and Price Stability," IMES Discussion Paper Series 13-E-08, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:13-e-08
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    File URL: http://www.imes.boj.or.jp/research/papers/english/13-E-08.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Fiscal policy; Financial stability; Monetary policy; Financial crisis; Banking crisis; Bank resolution;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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