Fiscal issues and central banking in emerging economies: an overview by Ramon Moreno published by BIS (10/2003).
The view that central banks have an incentive to monitor the fiscal position of the government rests on at least two grounds. First, the government may be tempted to call on the central bank for finance rather than borrow in capital markets. Second, fiscal policy can have a large impact on the economy due to its effects on aggregate demand, and because perceptions regarding the sustainability of fiscal policy can affect financial markets. Problems in the implementation of fiscal policy could therefore interfere with the two widely accepted goals of central banks, which are to control inflation and contribute to macroeconomic and financial stability. They could also adversely affect the balance sheet or profitability of the central bank. The risks to central bank goals are particularly high in emerging markets, where fiscal imbalances are frequently associated with economic disruptions and have impaired monetary policy implementation. Such disruptions are rare in advanced market economies, which appear to be less vulnerable to real or financial shocks, and whose governments are less susceptible to financing constraints. The papers in this volume explore the subject of the meeting on “Fiscal issues and central banking in emerging economies” held at the BIS in December 2002 by focusing on three broad questions. First, how should central banks assess and manage the fiscal position, particularly over the medium term? Second, what is the experience with the use of countercyclical fiscal policy? Third, how do fiscal operations affect central bank balance sheets, and to what extent should such balance sheet effects be a concern? The contributions by central bank participants and BIS staff address these questions by highlighting the issues and discussing cross-country experiences and policies. Within this framework, the papers focus on issues that central banks consider particularly important.