No abstract

We examine the effect of fiscal policy on sovereign risk spreads and investigate whether the interaction of fiscal variables with political institutions affect financial markets. Using panel data from emerging market countries, we find that revenue-based adjustment lowers spreads more than spending-based adjustment. Financial markets also react to the composition of spending. Cuts in current spending lower spreads more than cuts in investment. We show that debt-financed spending increases sovereign risk, while tax-financed spending lowers spreads, suggesting that international investors prefer the latter. Further, we find evidence that financial marketsÕ reaction to fiscal policy depends on political institutions.

This paper investigates the impact of low or high infl ation on the public debt-to-GDP ratio in the G-7 countries. Our simulations suggest that if infl ation were to fall to zero for fi ve years, the average net debt-to-GDP ratio would increase by about 5 percentage points during that period. In contrast, raising infl ation to 6 percent for the next fi ve years would reduce the average net debtto-GDP ratio by about 11 percentage points under the full Fisher effect and about 14 percentage points under the partial Fisher effect. Thus higher infl ation could help reduce the public debt-to-GDP ratio somewhat in advanced economies. However, it could hardly solve the debt problem on its own and would raise signifi cant challenges and risks. First of all, it may be diffi cult to create higher infl ation, as evidenced by Japan's experience in the last few decades. In addition, an unanchoring of infl ation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower-income households. JEL classifi cation: E31; F34; H63

How do countries mobilize large additions to tax revenue-defined as an average increase in the tax-to-GDP ratio of 0.5 percent per year over three years or more? To answer this question, we build a novel dataset covering 55 episodes of large tax revenue increases in low-income countries and emerging markets. We find that: (i) reforms of indirect taxes and exemptions are the most common tax policy measures; (ii) multi-pronged tax administration reforms often go hand in hand with tax policy measures; and (iii) sustainability of the episodes hinges on tax administration reforms in the key compliance areas (risk-based audits, registration, filing, payment, and reporting). JEL Classification Numbers: E62, H2

No abstract