Abstract
In this paper, the author finds links among changes in private and public debt during economic downturn and discusses their financial stability and fiscal sustainability consequences. Financial deepening in years before the economic downturn resulted in the growth of indebtedness among agents within economy that sustained afterwards. The European Union has not become less indebted during and after the economic meltdown, but the structure of debt holders has changed. The growth of private debt in the upturn phase resulted in a qualitatively new level of economy. However, in order to sustain the same level after the economic downturn, the public sector was forced to increase its debt. As a result, interactions among financial stability and fiscal sustainability have become more pronounced as monetary financial institutions experienced deleveraging from the private sector and an increase of leverage from the public sector. Thus, the financial stability and fiscal sustainability nexus is analysed by employing flow-of-funds data that show balanced interlinkages among real and financial flows. Recent discussions on sovereign debt instability and suggestions to diminish public debt whatever it costs lack an appropriate answer who will replace it as the flow-of-funds in economy is always in balance.
Highlights
The significant transformation of financial markets, institutions and infrastructures over the last few decades has substantially enhanced the role of finance in the economy
The last few decades saw a rapid liberalization in financial markets and the globalization of the world economy
The analysis of financial stability and fiscal sustainability has become increasingly important in order to mitigate fluctuations and negative outcomes
Summary
The significant transformation of financial markets, institutions and infrastructures over the last few decades has substantially enhanced the role of finance in the economy. The aim of this paper is to discuss interconnections among financial stability and fiscal sustainability by showing the real structural reasons of the public sector debt growth after the economic downturn. This paper evaluates the role of finance in the real economy in a simple manner by examining financial 72 deepening ratios (e.g., the gross debt to GDP ratio) or national accounts data on the net lending / net borrowing basis and their dynamics. The growth rate of the GDP in real as well as in nominal terms was by comparison substantially lower in the corresponding period This has resulted in an increase of general indebtedness measured as debt (financial liabilities) or net financial assets to GDP ratio. A healthy and sound financial system is essential in generating the economic development, but the price for an over-indebted economy and increasing risks arising from this in a volatile economic environment can be high
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
