Fiscal consolidation and financial reforms
journal contributionposted on 17.05.2017, 09:39 by Luca Agnello, Vitor CastroVitor Castro, Joao Tovar Jalles, Ricardo M. Sousa
We use a rare events logistic regression model as well as traditional probit and logit models to investigate the impact of fiscal consolidation on the likelihood of financial reforms for a panel of 17 countries over the period 1980–2005. We show that large austerity plans, mainly implemented through spending cuts rather than tax hikes, promote financial reforms. By considering reforms affecting specific areas of the financial sector, we find that the banking sector reforms and domestic finance reforms are more likely to occur when fiscal adjustments are put in place. Interestingly, while banking sector reforms are mainly prompted during periods of tax-driven consolidations, spending cuts driven consolidation packages seem to propel the implementation of domestic finance reforms. Finally, we show that higher inflation, lower degree of trade openness, a deterioration of financial conditions and, to some extent, a fall in the degree of competitiveness enhance the probability of financial reforms.
Castro and Sousa acknowledge that this work has been financed by the Operational Programme for Competitiveness Factors – COMPETE and by Fiscal consolidation and financial reforms 3753 National Funds through the FCT – Portuguese Foundation for Science and Technology within the remit of the project ‘FCOMP-01-0124-FEDER-037268 (PEst-C/EGE/UI3182/2013)’.
- Business and Economics