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Macroeconomic context and fiscal policy : Europe and Central Asia during 2000-2012
 
Author:Islam, Roumeen; Collection Title:Policy Research working paper ; no. WPS 6621
Country:Europe and Central Asia; Date Stored:2013/09/26
Document Date:2013/09/01Document Type:Policy Research Working Paper
SubTopics:Access to Finance; Economic Theory & Research; Currencies and Exchange Rates; Emerging Markets; Debt MarketsLanguage:English
Region:Europe and Central AsiaReport Number:WPS6621
Volume No:1 of 1  

Summary: This paper examines the interaction between fiscal policy and the broader macroeconomic context in open economies. It asks two questions. First, what was the relationship between fiscal policy and current account balances in countries in Europe and Central Asia during the past dozen years? Second, how might changes in (a) output composition and (b) financial sector profitability affect revenues and thus, the assessment of the underlying structural fiscal balance? The study finds that, for flexible exchange rate countries, expansionary fiscal policy has been associated with wider current account deficits. Moreover, changes in net exports and in financial sector profitability may have significant impacts on fiscal balances because of changes in revenues from the value-added tax and the corporate profits tax as a share of gross domestic product. These findings suggest that the countries of Europe and Central Asia have reason to be prudent in terms of fiscal policy choices, even as gross domestic product rises.

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