Role of fiscal consolidation in vulnerability to crisis: Evidence from Australian economy

Habib Ur-Rahman, Arthur Goldsmith, Gulasekaran Rajaguru, SafdarUllah Khan

Research output: Contribution to conferenceAbstractResearchpeer-review

Abstract

This study first aims to assess fiscal vulnerability to crisis, investigating through gross public debt, net public debt, and net financial liabilities of Australian economy. Fiscal vulnerability a contagion, poses a threat to the financial sector stability leading towards sovereign default. We argue that gradual fiscal consolidation may help to achieve fiscal sustainability and avoid financial crisis in future. Results of all three measures using gross public debt, net public debt, and net financial liabilities (% of GDP) indicate that Australian economy is vulnerable to debt crisis at an optimal level of 23.41 % (gross public debt to GDP). We also argue that growth, productivity, and gross domestic saving deteriorate when Australian general government gross public debt to GDP is above our proposed optimal level of 23.41 %. We empirically investigated the effects of fiscal consolidation on financial sector stability using the Bankscope data from 1990 to 2015 on tier-1 and tier-2 ratio along with bank-specific and macroeconomic controls. For this purpose, fiscal consolidation is measured using cyclical adjusted primary balance from 1990 to 2015. Using Arellano-Bond dynamic panel-data estimation, we find that standard capital adequacy ratio such as Tier-2 ratio improves by 0.964 following episodes of fiscal consolidation. These results suggest that capital adequacy ratio (Prudential standard APS 110-120 & Basel framework III) improves from the portfolio re-balancing from private to public securities which reduces the risk-weighted value of assets. Finally, this study offers policy implications necessary to maintain sustainable level of debt to GDP and avoid financial and banking crisis in future.
Original languageEnglish
Publication statusPublished - 2017
EventAustralian Conference of Economists: Economics for Better Lives - Sydney, Sydney, Australia
Duration: 19 Jul 201721 Jul 2017
Conference number: 46th
http://ace2017.org.au/ (ACE 2017 Home Page)
https://vimeo.com/250391912 (ACE Conference 2017 [Promotional Video])

Conference

ConferenceAustralian Conference of Economists: Economics for Better Lives
Abbreviated titleACE 2017
CountryAustralia
CitySydney
Period19/07/1721/07/17
OtherThe theme this year is “Economics for Better Lives” and sessions will consider issues such as inequality and poverty, financial regulation, taxation reform, education reform, the economics of mental health, utility regulation, transport economics, infrastructure, regional trade agreements, international migration flows, international aid and development, the role of behavioral economics the economics of populism, and macroeconomics in a low interest rate world. We are planning a special session on professional ethics for economists, and the future of the profession.

This is the premier Australian conference for economists in universities, public policy, business and finance. Each year we welcome many overseas economists including this year’s keynote speakers Carol Graham and Kip Viscusi. Generations of young economists and students have presented papers and connected with others at the conference, launching their careers. Our policy panels with distinguished academic and government economists have introduced new ideas and shaped public policy.
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Public debt
Vulnerability
Fiscal consolidation
Liability
Fiscal
Financial sector
Financial crisis
Capital adequacy ratio
Banking crisis
Macroeconomics
Domestic savings
Contagion
Threat
Panel data estimation
Debt crisis
Assets
Debt
Policy implications
Basel
Fiscal sustainability

Cite this

Ur-Rahman, H., Goldsmith, A., Rajaguru, G., & Khan, S. (2017). Role of fiscal consolidation in vulnerability to crisis: Evidence from Australian economy. Abstract from Australian Conference of Economists: Economics for Better Lives, Sydney, Australia.
Ur-Rahman, Habib ; Goldsmith, Arthur ; Rajaguru, Gulasekaran ; Khan, SafdarUllah. / Role of fiscal consolidation in vulnerability to crisis: Evidence from Australian economy. Abstract from Australian Conference of Economists: Economics for Better Lives, Sydney, Australia.
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Ur-Rahman, H, Goldsmith, A, Rajaguru, G & Khan, S 2017, 'Role of fiscal consolidation in vulnerability to crisis: Evidence from Australian economy' Australian Conference of Economists: Economics for Better Lives, Sydney, Australia, 19/07/17 - 21/07/17, .

Role of fiscal consolidation in vulnerability to crisis: Evidence from Australian economy. / Ur-Rahman, Habib; Goldsmith, Arthur; Rajaguru, Gulasekaran; Khan, SafdarUllah.

2017. Abstract from Australian Conference of Economists: Economics for Better Lives, Sydney, Australia.

Research output: Contribution to conferenceAbstractResearchpeer-review

TY - CONF

T1 - Role of fiscal consolidation in vulnerability to crisis: Evidence from Australian economy

AU - Ur-Rahman, Habib

AU - Goldsmith, Arthur

AU - Rajaguru, Gulasekaran

AU - Khan, SafdarUllah

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AB - This study first aims to assess fiscal vulnerability to crisis, investigating through gross public debt, net public debt, and net financial liabilities of Australian economy. Fiscal vulnerability a contagion, poses a threat to the financial sector stability leading towards sovereign default. We argue that gradual fiscal consolidation may help to achieve fiscal sustainability and avoid financial crisis in future. Results of all three measures using gross public debt, net public debt, and net financial liabilities (% of GDP) indicate that Australian economy is vulnerable to debt crisis at an optimal level of 23.41 % (gross public debt to GDP). We also argue that growth, productivity, and gross domestic saving deteriorate when Australian general government gross public debt to GDP is above our proposed optimal level of 23.41 %. We empirically investigated the effects of fiscal consolidation on financial sector stability using the Bankscope data from 1990 to 2015 on tier-1 and tier-2 ratio along with bank-specific and macroeconomic controls. For this purpose, fiscal consolidation is measured using cyclical adjusted primary balance from 1990 to 2015. Using Arellano-Bond dynamic panel-data estimation, we find that standard capital adequacy ratio such as Tier-2 ratio improves by 0.964 following episodes of fiscal consolidation. These results suggest that capital adequacy ratio (Prudential standard APS 110-120 & Basel framework III) improves from the portfolio re-balancing from private to public securities which reduces the risk-weighted value of assets. Finally, this study offers policy implications necessary to maintain sustainable level of debt to GDP and avoid financial and banking crisis in future.

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M3 - Abstract

ER -

Ur-Rahman H, Goldsmith A, Rajaguru G, Khan S. Role of fiscal consolidation in vulnerability to crisis: Evidence from Australian economy. 2017. Abstract from Australian Conference of Economists: Economics for Better Lives, Sydney, Australia.