Fiscal Policy, Public Debt and Monetary Policy in Emerging Market Economies

Abstract

During the 1980s and 1990s, the vulnerability of EMEs was often exacerbated by high fiscal deficits, underdeveloped domestic bond markets, and large currency or maturity mismatches. In many cases, these weaknesses constrained fiscal and monetary policy choices, and responses were often procyclical. Since the beginning of 2000s, however, the policy setting has much improved. Fiscal deficits and public debt levels have declined, domestic financing has increased, and the share of foreign currency debt has fallen. What do these developments mean for monetary policy? Has the threat of fiscal dominance in EMEs lessened, just when it has grown in the advanced economies? Have EMEs been able to use fiscal and monetary policy in more countercyclical way than in the past?

These questions were the focus of the 17th Annual Meeting of Deputy Governors from major EMEs held at the BIS in Basel on 16-17 February 2012. The meeting addressed three issues: (i) the fiscal constraints on monetary policy; (ii) the impact of local currency bond markets on central bank policies; and (iii) the role of central banks in public debt management. This BIS Paper volume brings together the papers prepared by the BIS staff for the meeting as well as the contributions of central banks.

One major finding was that improved fiscal positions have allowed many EMEs to use countercyclical fiscal and monetary policies to stabilise their economies during the recent global financial crisis. Anchoring medium term fiscal expectations was crucial, so was greater access to domestic financing enabled by the development of the local currency bond markets. Yet these reassuring conclusions came with a number of caveats. Although fiscal dominance has fallen, contingent liabilities and the costs of ageing populations pose serious medium- to long-term risks to many EMEs. And, while government debt levels have moderated, the volume of securities issued by central banks has expanded, reflecting large-scale interventions in the foreign exchange market. The implications of these balance sheet developments for price and financial stability require careful monitoring.

While the full publication can be downloaded using the above link, individual contributions are available separately:

Fiscal Policy, Public Debt and Monetary Policy in EMEs: An Overview

Is Monetary Policy Constrained by Fiscal Policy?

Developments of Domestic Government Bond Markets in EMEs and Their Implications

Central Bank and Government Debt Management - Issues for Monetary Policy

Fiscal Policy, Public Debt Management and Government Bond Markets: Issues for Central Banks

Fiscal Consolidation and Macroeconomic Challenges in Brazil

Macro Policies and Public Debt in Chile

Monetary Policy, Fiscal Policy and Public Debt Management Macroeconomic Effects of Structural Fiscal Policy Changes in Colombia

Some Insights into Monetary and Fiscal Policy Interactions in the Czech Republic The Importance of Fiscal Prudence under the Linked Exchange Rate System in Hong Kong SAR

The Impact of Public Debt on Foreign Exchange Reserves and Central Bank Profitability: The Case of Hungary

Sovereign Debt Management in India: Interaction with Monetary Policy

Fiscal Policy, Public Debt Management and Government Bond Markets in Indonesia

The Interaction between Monetary and Fiscal Policy: Insights from Two Business Cycles in Israel

Public Debt and Monetary Policy in Korea

Banco de México and Recent Developments in Domestic Public Debt Markets

Fiscal Policy Considerations in the Design of Monetary Policy in Peru

Fiscal Policy, Public Debt Management and Government Bond Markets: The Case for the Philippines A Framework for Fiscal Vulnerability Assessment and its Application to Poland

Fiscal Policy, Public Debt Management and Government Bond Markets: Issues for Central Banks

Aspects of Fiscal/Debt Management and Monetary Policy Interaction: The Recent Experience of Saudi Arabia

Development of the Government Bond Market and Public Debt Management in Singapore Fiscal Policy, Public Debt Management and Government Bond Markets: Issues for Central Banks Fiscal Policy and its Implication for Central Banks

Globalisation of the Interaction between Fiscal and Monetary Policy

JEL Classification: E52, E62, H63