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Financial Cycles and Fiscal Cycles

This is a joint work with Philip Lane prepared for the EUI-IMF conference “Fiscal Policy, Stabilization and Sustainability“.

Abstract: There is a huge literature on the behaviour of fiscal variables in relation to the output cycle. In this paper, we show that fiscal variables also co-vary with the financial cycle, as captured by fluctuations in the current account balance and credit growth. These financial factors affect fiscal outcomes, over and above their influence on the output cycle. We argue that fiscal surveillance and the design of fiscal rules should pay close attention to the interaction between the financial cycle and the fiscal cycle.

The full paper can be downloaded from here.