Fiscal Space and the Aftermath of Financial Crises: How It Matters and Why

Christina Romer and David Romer

No 25768, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In OECD countries over the period 1980–2017, countries with lower debt-to-GDP ratios responded to financial distress with much more expansionary fiscal policy and suffered much less severe aftermaths. Two lines of evidence together suggest that the relationship between the debt ratio and the policy response is driven partly by problems with sovereign market access, but even more so by the choices of domestic and international policymakers. First, although there is some relationship between more direct measures of market access and the fiscal response to distress, incorporating the direct measures attenuates the link between the debt ratio and the policy response only slightly. Second, contemporaneous accounts of the policymaking process in episodes of major financial distress show a number of cases where shifts to austerity were driven by problems with market access, but at least as many where the shifts resulted from policymakers’ choices despite an absence of difficulties with market access. These results may have implications for the conduct of policy both in normal times and in the wake of a financial crisis.

JEL-codes: E32 E62 G01 N10 N20 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-mac
Note: DAE EFG ME
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Published as Christina D. Romer & David H. Romer, 2019. "Fiscal Space and the Aftermath of Financial Crises: How It Matters and Why," Brookings Papers on Economic Activity, vol 2019(1), pages 239-331.

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Journal Article: Fiscal Space and the Aftermath of Financial Crises: How It Matters and Why (2019)
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