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Fiscal sustainability and the financial cycle

The authors look at channels through which financial cycles flatter fiscal accounts. They focus on how to estimate more reliable cyclically adjusted fiscal balances to take into account the nexus between the financial cycle and potential output. For them, the ultimate objective should be to design fiscal policy as part of a broader macro-financial stability framework aimed at taming the financial cycle and ensuring sustainable and balanced growth. Taming the financial cycle is not a task that can be left to macroprudential measures alone. Monetary and fiscal policies, too, have a role to play, they say. Fiscal policy ought to play a more proactive role to restrain financial booms in the first place. This means leaning more deliberately against financial booms, the authors conclude.

BIS working paper No 552
March 2016
Source: Bank for International Settlements

Claudio Borio, BIS
Marco Lombardi, BIS
Fabrizio Zampolli, BIS

>  Fiscal sustainability and the financial cycle


A frequently neglected aspect of financial booms and busts – financial cycles – is their impact on fiscal positions. And yet, the latest financial crisis and history show that these cycles can wreak havoc with public finances. After reviewing the impact of financial cycles on fiscal positions, we offer a new tool to estimate cyclically adjusted balances, illustrate its performance, explore its strengths and weaknesses, and sketch out a way forward to measuring sustainability in a more holistic way.