IMF paper warns fiscal policy is not sufficient to counter capital surges
A working paper, published by the International Monetary Fund (IMF) in September, suggests countercyclical fiscal policy is only partially effective in resisting large capital inflows.
The authors, Ruben Atoyan, Albert Jaeger and Dustin Smith, studied a capital surge into emerging Europe over the period 2003–07. The paper finds that tightening fiscal policy reduces yields, making investment less attractive. However, this effect is partially offset by the increased confidence caused by improvements in the budget.
The researchers say this means fiscal policy will act as a brake on capital inflows, but needs to be complemented by other policies. These, the authors suggest, could include monetary and exchange rate policy as well as capital controls.
Click here to read the paper.
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