Interest Rate, Asset Markets and Real Economy Channels
from Part III - Fiscal Risks
Published online by Cambridge University Press: 30 October 2020
Financial sector developments pose the second important fiscal risk for the coming years and decades and this is the first of two chapters mapping and analysing such fiscal–financial risks. Rising financing costs affect debt service expenditure, especially for countries with high debt and short-term financing. Asset price movements can constitute further major fiscal risks in a downturn. Adverse financial sector developments and negative confidence effects also burden public expenditure and finances via the real economy, and guarantees that fall due in ‘bad’ times can exacerbate this effect. Debt has ratcheted up over consecutive economic and financial cycles over the past forty years, an effect particularly strong during the global financial crisis due to fiscal–financial linkages. Simulations show that the situation of several advanced countries is critical, given their lack of fiscal buffers for another crisis.
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