Working Paper: NBER ID: w17379
Authors: Maurice Obstfeld
Abstract: This paper argues that if policymakers seek to enhance global liquidity, then the international community must provide a higher and better coordinated level of fiscal support than it has in the past. Loans to troubled sovereigns or financial institutions imply a credit risk that ultimately must be lodged somewhere. Expanded international lending facilities, including an expanded IMF, cannot remain unconditionally solvent absent an expanded level of fiscal backup. The same point obviously applies to the European framework for managing internal sovereign debt problems, including proposals for a jointly guaranteed eurozone sovereign bond. Even attainment of a significant role for the Special Drawing Right depends upon enhanced fiscal resources and burden sharing at the international level.
Keywords: international liquidity; fiscal support; global financial stability
JEL Codes: F33; F34; F36; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in global liquidity (F65) | coordinated fiscal response from the international community (F42) |
| lack of fiscal backup for international lending facilities (F34) | solvency risks (G33) |
| loans to troubled sovereigns (F34) | credit risks that must be managed through fiscal mechanisms (H12) |
| fiscal burden of providing international liquidity (F33) | systemic risks (F65) |
| absence of fiscal coordination (F42) | vulnerability of the international liquidity system (F65) |