Fiscal Policy and Financial Markets

15 Pages Posted: 8 Oct 2008

See all articles by Bernardin Akitoby

Bernardin Akitoby

International Monetary Fund (IMF) - Fiscal Affairs Department

Thomas Stratmann

George Mason University - Buchanan Center Political Economy; George Mason University - Mercatus Center; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: 0000

Abstract

We examine the effect of fiscal policy on sovereign risk spreads and investigate whether the interaction of fiscal variables with political institutions affect financial markets. Using panel data from emerging market countries, we find that revenue-based adjustment lowers spreads more than spending-based adjustment. Financial markets also react to the composition of spending. Cuts in current spending lower spreads more than cuts in investment. We show that debt-financed spending increases sovereign risk, while tax-financed spending lowers spreads, suggesting that international investors prefer the latter. Further, we find evidence that financial markets reaction to fiscal policy depends on political institutions.

Suggested Citation

Akitoby, Bernardin and Stratmann, Thomas, Fiscal Policy and Financial Markets (0000). The Economic Journal, Vol. 118, Issue 533, pp. 1971-1985, November 2008, Available at SSRN: https://ssrn.com/abstract=1280446 or http://dx.doi.org/10.1111/j.1468-0297.2008.02198.x

Bernardin Akitoby (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Thomas Stratmann

George Mason University - Buchanan Center Political Economy ( email )

4400 University Drive
Fairfax, VA 22030
United States
703-993-2330 (Phone)

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

HOME PAGE: http://www.mercatus.org/scholars/thomas-stratmann

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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