Fiscal Policy and Financial Depth

Ricardo Caballero () and Arvind Krishnamurthy

No 10532, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Most economists and observers place the lack of fiscal discipline at the core of the recent Argentine crisis. This begs the question of how countries like Belgium or Italy (pre-Maastricht) could run large fiscal deficits and accumulate debts far beyond those of Argentina, without experiencing crises nearly as dramatic as that of Argentina? Why is it that Argentina cannot act like Belgium or Italy and pursue expansionary fiscal policy during downturns? We argue that advanced and emerging economies differ in their financial depth, and show that lack of financial depth constrains fiscal policy in a way that can overturn standard Keynesian fiscal policy prescriptions. We also provide empirical support for this viewpoint. Crowding out is systematically larger in emerging markets than in developed economies. More importantly, this difference is extreme during crises, when the crowding out coefficient exceeds one in emerging market economies.

JEL-codes: E44 E62 (search for similar items in EconPapers)
Date: 2004-05
New Economics Papers: this item is included in nep-mfd
Note: CF EFG IFM
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Citations: View citations in EconPapers (94)

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