Optimal Macroprudential-Fiscal Policy and Financial Stability : The Effects on Private Debt Deleveraging in Advanced and Emerging Economies

Sammanfattning: What is the optimal interaction between macroprudential and fiscal policy to foster financial stability? This thesis evaluates whether policy interaction can impact private debt growth. First, a model is built with borrowing constraints that illustrate the links between private and public debt dynamics. The derived hypothesis and theoretical predictions indicate that a tighter macroprudential stance is reinforced by prudential fiscal policies, conditional on the initial level of public debt and scope for countercyclical fiscal policies. Second, the hypothesis is tested by using a dynamic panel data model for a sample of 49 advanced and emerging economies over the period 2000-2013. Whilst the interaction term alone yields insignificant results, interesting inferences can be drawn of the findings within the context of existing literature. The suggestion is that there may exist two opposing effects associated with the interaction between macroprudential and fiscal policy on private debt. Moreover the outcome of this interaction is contingent upon the levels of public debt and private indebtedness.