Fiscal Policy During Absorption Cycles

Reforming the Architecture of EMU: Ensuring Stability in Europe

“…Recent research shows that a turn of the financial cycle has a much larger negative impact on public finances than a turn of the normal business cycle (Borio, 2012b, Bénétrix andLane, 2013). This is mostly due to their effect on government revenues (Eschenbach and Schuknecht, 2004;Dobrescu and Salman, 2011;Lendvai et al, 2011). Rising asset prices increase revenues in capital gains and transaction taxes.…”

Towards a Stable Monetary Union: What Role for Eurobonds?

“…Booms lead to a large temporary increase in revenues. Rising asset prices increase revenues in capital gains and transaction taxes, while wealth effects drive up the share of domestic demand in the economy and thereby indirect tax revenues (Eschenbach and Schuknecht, 2004;Dobrescu and Salman, 2011;Lendvai, Moulin and Turrini, 2011). These temporary revenues are usually mistaken for lasting improvements, also because current methods of cyclical adjustment do not properly correct for the financial cycle.…”