Derivatives, Fiscal Policy and Financial Stability

ICFAI Journal of Derivatives, Vol. 2, No. 3, pp. 7-25, 2005

25 Pages Posted: 14 Jul 2006  

Chiara Oldani

LUISS Guido Carli University; University of Viterbo Dept of Economics; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Paolo Savona

Luiss University

Abstract

The massive use of derivatives and securitisation by sovereign States for public debt and deficit management is a growing phenomenon in financial markets. Financial innovation can modify risks effectively run and alter the stability of the public sector finance. The experience of some developed and developing countries is surveyed to look at main instruments used and aims of public finance. Financial stability of the public sector is analysed considering financial innovation use. The case of Italy and its scarce disclosure of information are presented. An IS-LM model is used to capture the effect of financial innovation on fiscal policy for high indebted (European) industrialised countries, with deficit constraints, starting from Blanchard (1981). The use of financial innovation can have various effects over debt and deficit management, given binding external burden (like the European criteria) as far as risks are properly considered, expectations of fiscal policy are coherent with that of markets, and no exogenous shock occurs.

Keywords: fiscal policy, financial stability, derivatives and securitisation

JEL Classification: H8, G2, G3, G19

Suggested Citation

Oldani, Chiara and Savona, Paolo, Derivatives, Fiscal Policy and Financial Stability. ICFAI Journal of Derivatives, Vol. 2, No. 3, pp. 7-25, 2005. Available at SSRN: https://ssrn.com/abstract=914128

Chiara Oldani (Contact Author)

LUISS Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

University of Viterbo Dept of Economics ( email )

Via Palmanova
Viterbo, 00110
Italy

HOME PAGE: http://www.didattica.unitus.it/web/interna.asp?idCat=1689&idDoc=365&idDip=4

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Paolo Savona

Luiss University ( email )

via de' Crociferi n. 41
00187 Rome, Roma
Italy

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