We are pleased to announce the publication of a new Working Paper by Dr Donghyun Park, Director of MMPM and co-authors Gazi Salah Uddin, Anh H. Le, Naoki Yago and John Beirne:
(WP3/2026) Global Fragmentation, Fiscal Policy, and Economic Growth: A Cross-country Analysis
This paper studies the macroeconomic implications of geopolitical risks and the role of fiscal sustainability in mitigating them. Our empirical analysis exploits a comprehensive database covering 121 countries from 1985 to 2023. We find that, in countries without fiscal rules, geopolitical fragmentation leads to a persistent decline in output and a surge in the debt-to-GDP ratio. However, in countries with fiscal rules, both output and debt are stabilised in the medium- to long-run. Moreover, fiscal rules have a more pronounced effect in countries with high central bank independence, suggesting a novel monetary-fiscal complementarity. We further explore various dimensions of cross-country heterogeneity, including economic development, political institutions, and climate risks. Finally, fiscal rules promote inclusive growth by mitigating adverse distributional effects of geopolitical risks.
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