austerity measures

Financial Policy Responses
3 Maintaining Fiscal Control While there may be some dispute over what constitutes an optimal long-run fiscal stance for developing countries there is little, if any, about the importance of ensuring that this stance persists over time.12 A number of papers have studied variations in the persistence of periods of fiscal stability, contrasting the experience of middle-income and low-income developing countries with those of the OECD.13 Fiscal outcomes are found to differ markedly between OECD and developing countries. For the OECD the fiscal stance is, on average, broadly stationary with a strong cyclical component. By contrast, for developing countries over the last three decades this pattern is the exception rather than the rule. Rather, the fiscal stance is highly asymmetric, vulnerable in the face of adverse output shocks, and not particularly buoyant in the face of positive shocks, with the consequence that extended periods during which a broadly sustainable fiscal

Policy implications
The crisis has exposed flaws in many policy frameworks. In particular, it has shown the limits of traditional macroeconomic policy measures in dealing with deep recessions associated with financial meltdowns. It has highlighted the shortcomings associated with the lack of clear mechanism for the resolution of financial institutions operating across borders. These flaws have reignited some old debates on whether macroeconomic policy should deal with asset price booms and has highlighted that national and international financial architectures had fallen behind rapidly integrating financial systems.
We stress upfront that many elements of the macroeconomic and regulatory frameworks remain valid. Surely stable inflation and sustainable public accounts remain important goals. And while improvements in micro-prudential regulations are needed to reduce financial markets’ procyclicality, rules calling for well-capitalized and transparent banks adhering to sound corporate governance and accounting standards remain valid. At the international level, the answer is certainly not a repeal of financial integration, but rather a call for greater coordination across regulators and clearer rules for cross-border resolution.
Yet, the crisis has shown that dangerous vulnerabilities can brew under a seemingly calm macroeconomic surface with low inflation and stable output gap. In that context, progress has to be made on how to assess vulnerabilities in asset and credit markets and incorporate them into macroeconomic and regulatory policies. The evidence in this and other papers suggest that greater monitoring of housing and credit markets may be a good start. Progress also has to be made with respect to the international financial architecture. Regulators have been discussing the importance of information sharing and coordinated responses to financial markets stress in the context of cross-border supervision issues. Hence, the broad reform agenda for the future that we touch upon in this section focuses on these two dimensions.
Finally, an important caveat: while there are lessons for macroeconomic policy and financial regulations, there remain many areas of unknowns where further policy research would be useful. These include areas such as competition policy for a stable financial system, approaches to consumer protection in financial services, and how to address the political economy pressures regarding financial deregulation, financial openness, and financial crises.