ARE FISCAL RULES CONDUCIVE TO PRIVATE CREDIT GROWTH?
This paper studies the relationship between fiscal rules and private credit growth. A wealth of literature on fiscal rules has primarily praised their ability to reduce deficits and mitigate the negative consequences of financial busts. This paper suggests another facet of fiscal rules and proposes two transmission channels through which they may lead to private credit growth. First, fiscal rules improve economic fundamentals, such as lower inflation volatility, higher sovereign credit ratings, and lower sovereign bond interest rates. These macroeconomic improvements reduce uncertainty and may reassure investors in their market positions and projections, pos- sibly exacerbating their optimism and crowding-in private investment. Second, willingness to invest may be exacerbated by political incentives to engineer credit-based consumption and investment in the presence of fiscal constraints. In this respect, governments might fuel finan- cial activity by taking control of banking regulation, providing deposit guarantees, and relaxing credit controls. Put in a nutshell, I hypothesize that fiscal rule strength increases private lever- age. Empirical results corroborate that fiscal rule strength has a positive effect on private credit, although this effect is not necessarily conducive to unsustainable levels of private leverage (i.e. to systemic banking crises). This paper aims to contribute to a growing literature emphasizing the importance of fiscal policy for financial stability.
Embargo Lift Date
Showing items related by title, author, creator and subject.
PUBLIC-PRIVATE PARTNERSHIPS AND FISCAL RULES DO THE ADOPTION AND STRENGTH OF NUMERICAL FISCAL RULES IN EUROPE ENCOURAGE THE USE OF PUBLIC-PRIVATE PARTNERSHIPS? Tejada-Ibanez, Mikel (Georgetown University, 2013)Increasing public deficit and debt constitute a major problem in public finance. Fiscal rules attempt to constrain the incentives of politicians and policymakers to elude fiscal responsibility. However, previous research ...
The Role of Federal Tax Credits in U.S. Solar Industry Growth: An Analysis of the Relationship Between the Business Investment Tax Credit and Installed Solar Photovoltaic Capacity in the United States from 1997-2015 Hackman, Charles Alexander (Georgetown University, 2018)Tremendous growth has been observed in the U.S. solar industry over the last two decades. While technological improvements and falling costs have played large roles, a federal policy that provided a 30 percent tax credit ...