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The literature on the interaction of fiscal risk and financial stability– a survey

Victor Echevarria-Icaza ()
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Victor Echevarria-Icaza: Universidad Complutense de Madrid Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa)

No 16-04, Working Papers from Asociación Española de Economía y Finanzas Internacionales

Abstract: The article reviews the literature on related aspects of financial crises. First, we analyze how fiscal policy may become unsustainable, be it because of worsening fundamentals or increasing financial turmoil. We pay particular attention to the literature on the role of financial institutions and the nexus with the sovereign. This nexus may mean that sovereign stress is transferred to the banks, via holdings of sovereign debt or vice versa, on account of the implicit (or explicit) guarantee from the sovereign that banks may have. Secondly, we review the determinants of connectedness amongst financial institution and between banks sovereigns. The indicators of connectedness can help understand how systemic risk builds up. Finally, we analyze how the debate on macroprudential policy has evolved to tackle the issue of system-wide financial stress. Acknowledgements: The author is grateful to Simón Sosvilla for his comments and support.

Date: 2016-04
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