The financial and fiscal stress interconnectedness: The case of G5 economies

Magkonis, Georgios; Tsopanakis, Andreas

doi:10.1016/j.irfa.2016.03.019

Cited by 17 publications

(10 citation statements)

References 16 publications

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“…Our paper is also closely related to the literature of fiscal sustainability and financial stress. Magkonis and Tsopanakis (2016) highlight the need for a broad array of fiscal conditions indicators to measure fiscal sustainability. In this sense, most indicators essentially look at historical data.…”

Section: Related Literaturementioning

confidence: 99%

“…The crisis in the Euro area highlighted the importance of monitoring the sustainability of the public sector when dealing with financial stability. 1 Magkonis and Tsopanakis (2016) document that there is a strong interconnection between financial and fiscal stress. In this way, unsustainable fiscal conditions can affect banks and, as a result, be further transmitted not just to the entire economy, but also abroad through financial linkages.…”

Section: Introductionmentioning

confidence: 99%

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Fiscal risk and financial fragility

Silva

Guerra

Tabak

2020

Emerging Markets Review

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This paper proposes a new methodology to evaluate the importance of fiscal r isk t o financial stability. We first develop a novel method to estimate the probability of default of public entities, which takes into account a strict legal framework is mandatory for governments. Using options theory, we model the volatile public revenues using country macroeconomic expectations while allowing expenses, which cannot be easily reduced, to grow with inflation. Next, we compute the expected losses due to fiscal risk using a combination of the probability of default with potential losses that the public sector would impose on the economy using a complex network model. Motivated by the crisis on Brazilian states after 2015, we use Brazil to illustrate the usefulness of our model. We estimate the probability of default of states using legal restrictions on consolidated debt and personnel expenses. While most states are struggling to comply with limits on personnel expenses, the richest states have trouble to comply with limits on the consolidated debt. Using a network model that embeds counterparty and funding risks to estimate losses, we find state-owned banks are most likely to be affected if states default on bank credit. Financial contagion is small mostly because the banks that are more exposed to the public sector are highly capitalized.

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Section: Related Literaturementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Fiscal risk and financial fragility

Silva

Guerra

Tabak

2020

Emerging Markets Review

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“…On the other hand, fiscal policies can be somewhat destabilizing if they are procyclical [Furceri and Jalles (2018)], adding to inflation volatility. Magkonis and Tsopanakis (2016) studied the empirical fiscal-financial stress interconnectedness and found that it has increased since the global financial crisis calling for more integrated fiscal-financial macroprudential stability policies.…”

Section: Literature Reviewmentioning

confidence: 99%

A Note on Inflation Dynamics, Price Volatility, and Fiscal Activism

Afonso

Jalles²

2019

Macroecon. Dynam.

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Using a panel of 54 countries between 1980 and 2013, we find empirical support for the view that changes in the fiscal policy stance (year-on-year change in the cyclically adjusted primary balance) have a significant positive correlation with inflation volatility. An increase in the volatility of discretionary fiscal policies by one standard deviation raises inflation volatility by about 6%. Moreover, results using alternative inflation volatility proxies confirm that an expansionary fiscal stance increases price volatility. Another relevant outcome is that in a context of economic expansions (recessions) the harmful impact of fiscal activism on price volatility is soft (heightened), while the negative impact of fiscal activism on price stability is higher when fiscal policy is expansionary. Finally, fiscal activism fuels inflation volatility much more pronouncedly in emerging market economies vis-à-vis advanced economies.

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“…The current problems of systematic risks have emerged as a risk for financial markets and banking sectors. The trend of implementation of suitable macro-prudential policies is in practice for the protection of financial markets (Magkonis & Tsopanakis, 2016). Borio (2017) wrote "Macroeconomics without the financial cycle is very much like Hamlet without the Prince: a play that has lost its main character," which means that macroeconomic policies are of no use or would be ineffective, as far as the financial cycle and its characteristics are not considered by the governments while devising a policy.…”

Section: Introductionmentioning

confidence: 99%

“…The set of aggregate indicators, namely, the fiscal vulnerability, financial stress and macroeconomic policies indices have been used as proxies of the swings within the economy, effects of financial cycles and the effectiveness of macroeconomic policies. The innovative approach of constructing these indices can capture the stress volatility spillovers within an economy (Magkonis & Tsopanakis, 2016). The study focuses on the country-level analysis and analyzes potential national spillover effects.…”

Section: Introductionmentioning

confidence: 99%

An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study

Chandia

Iqbal

Bahadur

2022

FREP

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PurposeThis study aims to analyze the imbalances in the public finance structure of Pakistan’s economy and highlight the need for comprehensive reforms. Specifically, it aims to contribute to the empirical literature by analyzing the relationship between fiscal vulnerability, financial stress and macroeconomic policies in Pakistan’s economy between 1971 and 2020.Design/methodology/approachThe study develops an index of fiscal vulnerability, an index of financial stress and an index of macroeconomic policies. The fiscal vulnerability index is based on the patterns of fiscal indicators resulting from past trends of the selected variables in Pakistan’s economy. The financial stress in Pakistan is caused from the financial disorders that are acknowledged in the composite index, which is based on variables with the potential to indicate periods of stress stemming from the foreign exchange market, the securities market and the monetary policy components. The macroeconomic policies index is developed to analyze the mechanism through which fiscal vulnerability and financial stress have influenced macroeconomic policies in Pakistan. The causal association between fiscal vulnerability, financial stress and macroeconomic policies is analyzed using the auto-regressive distributive lags approach.FindingsThere exists a long-run relationship between the three indices, and a bi-directional causality between fiscal vulnerability and macroeconomic policies.Originality/valueThis study contributes to the development of a fiscal monitoring mechanism, which has the basic purpose of analyzing the refinancing risk of public liabilities. Moreover, it focuses on fiscal vulnerability from a macroeconomic perspective. The study tries to develop a framework to assess fiscal vulnerability in light of “The Risk Octagon” theory, which focuses on three risk components: fiscal variables, macroeconomic-disruption-associated shocks and non-fiscal country-specific variables. The initial contribution of this work to the literature is to develop a framework (a fiscal vulnerability index, financial stress index and macroeconomic policies index) for effective and result-oriented macro-fiscal surveillance. Moreover, empirical literature emphasized and advised developing countries to develop their own capacity mechanisms to assess their fiscal vulnerability in light of the IMF guidelines regarding vulnerability assessments. This study thus attempts to fulfill the said gap identified in literature.

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The financial and fiscal stress interconnectedness: The case of G5 economies

Cited by 17 publications

References 16 publications

Fiscal risk and financial fragility

Fiscal risk and financial fragility

A Note on Inflation Dynamics, Price Volatility, and Fiscal Activism

An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study

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