Determinants of the Public Budget Balance: The Role of Official Capital Flows

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may University of Groningen This version: February 2017Abstract Central banks invest their foreign exchange reserves predominantly in government bonds. The global accumulation of reserves therefore affects the equilibrium in the market for government bonds of reserve currency countries. By means of a panel data analysis we examine the relationship between reserve currency status and public budget balance during different constellations of the international monetary system: the sterling period and the dollar dominance (since World War II). We show for both periods that reserve currency status significantly lowers the public budget balance of the center countries. These novel findings are robust to a battery of sensitivity tests involving regression specification, instrumentation and data sources. By conclusion, the global accumulation of official reserve assets leads to more expansionary fiscal policies in the center countries.

Robust structural determinants of public deficits in developing countries

“…Indeed, the automatic stabilizer mechanism requires government revenues and the budget balance to deteriorate during a recession and improve during an expansion. These results have been established by several empirical studies (see among others, Morrison, 1982;Roubini and Sachs, 1989;Woo, 2003a;Steiner, 2017).…”

“…Indeed, for a given interest rate level, countries with a higher debt level are more prone to budget deficits because of higher debt services. However, it is also possible to imagine that the level of debt serves as an automatic stabilizer in the sense that highly indebted countries would tend to apply more restrictive fiscal policies in order not to jeopardize public finances (Steiner, 2017). But as these policies could have adverse effects on growth, they could lead to an increase in the budget deficit in the long term.…”

“…The development of the domestic financial sector plays a decisive role in a nation's ability to finance its budget deficit. When local financial markets are developed, governments can more easily cover a deficit by issuing bonds and are less dependent on inflationary financing (Steiner, 2017). Empirical studies show that countries with developed financial markets are characterized by lower budget balances (see among others Woo, 2003a;Steiner, 2017).…”

“…The same reasoning applies for the dependency of young people (people under 15). Woo (2003a) and Steiner (2017) show that developing countries with higher old-age dependency ratios also have higher fiscal deficits.…”

“…The fiscal balance is the consequence of various macroeconomic, political, demographic, institutional and social factors. Since the early 1980s, several empirical studies have focused on the determinants of public deficits (see, among others, Morrison, 1982;Roubini and Sachs, 1989;Roubini, 1991;Woo, 2003a;Tujula and Wolswijk, 2004;Steiner, 2017). Although some of these studies involve developing countries and emerging economies (Morrison, 1982;Roubini, 1991 andWoo, 2003a), the sample of these countries is often limited due to data availability over the study period.…”