Role of institutions in fiscal and monetary policies

This dissertation examines the determinants that enable the governments to maintain their deficits and debts at sustainable levels while dealing with fiscal challenges. We focus the dynamic role of institutional features on the long-term public debt level and on the speed of adjustment to fiscal shocks. We use an error-correction methodology and a panel data set of diverse countries to disentangle the role of institutions in determining fiscal sustainability. We also incorporate the idea of hidden liabilities in our model and propose a method of estimating its size.; In Chapter 1, our findings are as follows: First, political system and party structure plays a key role in timely adjustment of fiscal policy. Second, institutional weakness and distortions in the economy turn out to be prominent factors in putting the government in a position to become a large borrower. Third, understanding the dynamics of the public debt and the different experiences of different countries in managing their public finances requires a detailed model and assessment of institutions.; In Chapter 2, we discuss the factors that increase or decrease hidden liabilities or their exposure rates. First, the institutional factors which tend to raise public spending, such as fractionalization in the government, election concerns and increased need for social insurance, also motivate the politicians to resort to hiding liabilities. Second, large pre-existing public debt or lack of government credibility are the factors that increase hidden debt. Third, extensive market intervention is another factor that further contribute to the creation of larger stock of hidden liabilities. Finally, the monitoring function of IMF standby programs ensures the stock of hidden debt to decline.; In Chapter 3, we study how institutional factors influence the monetization of budget deficits. First, the existence of an independent central bank reduces the monetization of fiscal deficits. Second, we find that the government credibility, political and economic cost of additional tax increase, international interest rates are the factors that influence long-term size of monetization. Third, the government credibility and the corruption levels are the factors that influence the speed of short-term adjustment.