Working Paper: CEPR ID: DP9563
Authors: Maurice Obstfeld
Abstract: Banking systems have rapidly grown to a point where for many countries bank assets amount to multiples of GDP. As a consequence, government?s 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.
Keywords: bank resolution; banking crisis; financial crisis; financial stability; fiscal policy; monetary policy
JEL Codes: E44; E58; E63; F62; G15; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal prudence (E62) | Credibility of government support (H81) |
| Credibility of government support (H81) | Financial stability (G28) |
| Public debt levels (H63) | Economic performance (P17) |
| Fiscal prudence (E62) | Financial stability (G28) |
| High public debt (H69) | Economic contractions during financial crises (G01) |