Work Package Leader



The general objective of this work package consists in investigating theoretically and empirically the relations between financial stability and macroeconomic policies, distinguishing among the latter monetary, tax and fiscal policies.


Specific objectives:

  • To explore whether and how price stability and financial stability are related – for example, how low interest rates, used to influence via demand-management effects inflation rates, might potentially ensure financial stability, or how low interest rates might be responsible for the crisis because among other things of leverage effects. The implications of the theoretical research on optimal monetary policy are also explored, for example should financial stability be one of the objectives assigned to the monetary authorities, and if so what are the relevant policy instruments.
  • To investigate how budgetary policies interact with the performance and behaviour of the financial sector. Among budgetary policies, those tax policies intended to increase private savings (including those aimed to increase savings towards pension provisions), and the implications of increased private savings for the financial resources of the banking sector, would be explored. Other tax policies (for example, on income and capital gains) which promote seeking high yield investments would also be explored. The possible drawbacks of such policies, notably in terms of risk, would be analysed and the question of who in society ultimately bears the risk would be answered.
  • To consider the effects of tax policies on the level and transfer of risk, the effect of fiscal and tax policies on public debt accumulation, and the effect of the latter on interest rates and private investment would be investigated. In short, the incidence of budget policies on default risk premia, either in the short, the mid or the long run, would be appraised. Consequently, the potential impact of fiscal austerity on default risk premia would be discussed.
  • To investigate the nature of fiscal policies, which could be seen as beneficial or detrimental (‘good’ or ‘bad’) from their different abilities to dampen the crises, and to promote financial stability as a ‘public good’. It would include the investigation of the ways in which the designs of the tax system (at the national and European Union levels) impact on macroeconomic and financial stability (e.g. through the operation of fiscal ‘automatic stabilizers), and this would also lead into an investigation of the ways in which the scale of government and public expenditure matter for macroeconomic and financial stability.

Jérome Creel Interview