Fiscal Policy, Public debt and monetary policy in emerging market economies

Some of topics presented in this summary are :

Fiscal policy, public debt and monetary policy in EMEs. Is monetary policy constrained by fiscal policy? Developments of domestic government bond markets in EMEs and their implications. Central bank and government debt management: issues for monetary policy.

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One major finding emerging from the meeting was that improved fiscal positions helped many EMEs to rely on countercyclical fiscal and monetary policies to stabilise their economies during the recent global financial crisis. Anchoring medium-term fiscal
expectations was crucial, but it was not by itself sufficient to insulate the economy from the shock. Greater access to domestic financing and the consequent reduction of currency mismatches, enabled by the domestic currency bond market, played an important role.

Several country papers in this volume discuss the factors heralding this change. In mostcases, measures to strengthen medium-term fiscal sustainability and monetary policycredibility played a decisive role. Brazil provides an interesting example of a dramaticturnaround in an economy that was once considered to be very vulnerable to crisis and procyclical policies.

As noted in the paper prepared by Araújo, Azevedo and Costa, Brazil’spolicy flexibility was enhanced by a number of critical policy reforms in the 1990s and 2000s,including the switch to an inflation targeting regime; concerted actions by the central bankand the Treasury to reduce the magnitude of short-term and various types of index-linkeddebt in the economy; and the introduction of the 1999 Fiscal Responsibility Law to strengthenfinancial institutions and transparency as well as to reinforce the goal of maintaining consistent primary surpluses.