Islam, Roumeen2013-11-252013-11-252013-09https://hdl.handle.net/10986/16315This paper examines the interaction between fiscal policy and the broader macroeconomic context in open economies. It asks two questions. First, what was the relationship between fiscal policy and current account balances in countries in Europe and Central Asia during the past dozen years? Second, how might changes in (a) output composition and (b) financial sector profitability affect revenues and thus, the assessment of the underlying structural fiscal balance? The study finds that, for flexible exchange rate countries, expansionary fiscal policy has been associated with wider current account deficits. Moreover, changes in net exports and in financial sector profitability may have significant impacts on fiscal balances because of changes in revenues from the value-added tax and the corporate profits tax as a share of gross domestic product. These findings suggest that the countries of Europe and Central Asia have reason to be prudent in terms of fiscal policy choices, even as gross domestic product rises.en-USCC BY 3.0 IGOAccountingaccumulation of debtactual valuesadvanced countriesadvanced economiesaggregate demandARIMAbudget deficitsbusiness cyclecapital flightcapital flowcapital flowscapital inflowscapital outflowscommercial bankscommoditycommodity pricesconsolidationconsumption demandcontrol variablecorporate income taxescorporate profitscorporate taxCorporate Taxescountry fixed effectscredit defaultcredit default swapscredit marketscreditworthinesscurrent accountcurrent account balancecurrent account balancescurrent account deficitcurrent account deficitsCurrent Account DynamicsCurrent accountscyclical fluctuationsdebt crisisdebt ratiosdependent variabledepositdeposit money banksdeveloping countriesdevelopment policydomestic demanddomestic financial sectorsdummy variableeconomic crisisEconomic Policyelasticityemerging economiesemerging marketemerging marketsequilibrium pricesequity marketsExchange Rate Arrangementsexchange rate regimeexpansionary fiscal policyexpenditureexpenditure increasesexplanatory variableexplanatory variablesexport earningsexport ratioexport shareexportersexternal balancesexternal borrowingexternal debtexternal debtsexternal deficitexternal deficitsexternal financingfinancial assetsfinancial crisisFinancial Developmentfinancial flowsfinancial marketfinancial marketsfinancial opennessfinancial sectorfinancial stressfinancial systemfiscal balancefiscal balancesfiscal consolidationfiscal deficitfiscal deficitsfiscal policiesFiscal Policyfixed effectsfixed exchange ratefixed exchange rate countriesfixed exchange rate regimefixed exchange rate systemfixed exchange rate systemsfixed exchange ratesflexible exchange rateflexible exchange rate countriesflexible exchange ratesflexible ratesforecastsForeign Assetforeign assetsforeign debtforeign liabilitiesGDPGDP per capitageneral equilibriumglobal capitalglobal capital marketsglobal financial marketsglobal macroeconomic conditionsglobal marketglobal marketsgovernment accountsgovernment budgetgovernment expendituresgross domestic productGrowth rateimbalancesimportimport demandimportsincome taxincome taxesindebted countriesindebtednessindustrial countriesinstrumentinterest paymentsinterest rateinterest ratesInternational BankInternational Debtinternational financial marketinternational marketinternational marketsInternational Moneyinvestor confidencelenderslocal currencylong run equilibriumlow interest rateslow-income countriesmacroeconomic conditionsMacroeconomic ContextMacroeconomic EffectsMacroeconomic Policiesmacroeconomic variablesMacroeconomicsmarket conditionsmarket riskmonetary authoritiesMonetary Fundmonetary policiesnet exportsoil exportersoil exporting countriesoil revenuesopen economiesopen economyoptimizationoutput gapoutput gapsoutput responsesoutturnsper capita incomepersonal incomepositive coefficientpotential outputPoverty Reductionprivate capitalprivate capital flowsprofitabilitypublic financespublic savingspush factorsRate of Returnreal exchange ratereal exchange rate appreciationreal GDPrecessionrecessionsregression analysisreturnReturn on Assetreturn on assetsreturnsrisk averseshort-term fluctuationssovereign debttaxtax collectiontax revenuestax structurestax systemsTaxationtrade balancetrade balancesTrade growthtrade integrationtrade opennesstransactionunemploymentvalue addedvolatilityweightsWorld Development Indicatorsworld interest rateWorld Bank10.1596/1813-9450-6621