On Keeping Your Powder Dry: Fiscal Foundations of Financial and Price Stability

Posted: 24 Jul 2013

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Date Written: July 2013

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 Classification: E44, E58, E63, F62, G15, G28

Suggested Citation

Obstfeld, Maurice, On Keeping Your Powder Dry: Fiscal Foundations of Financial and Price Stability (July 2013). CEPR Discussion Paper No. DP9563. Available at SSRN: https://ssrn.com/abstract=2297202

Maurice Obstfeld (Contact Author)

University of California, Berkeley ( email )

530 Evans Hall #3880
Berkeley, CA 94720
United States

HOME PAGE: http://www.mauriceobstfeld.com

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research ( email )

London
United Kingdom

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