Monetary and Economic Studies Vol.29 / November 2011

International Liquidity: The Fiscal Dimension

Maurice Obstfeld

All schemes to enhance global liquidity require a higher level of fiscal support and coordination from the international community. Loans to troubled sovereigns or financial institutions imply a credit risk that ultimately must be lodged somewhere. Expanded international lending facilities, including an expanded International Monetary Fund, require an expanded level of fiscal backup. The same point obviously applies to the European framework for managing internal sovereign debt problems, including proposals for a jointly guaranteed euro zone sovereign bond. Even attainment of a significant role for the Special Drawing Right depends upon enhanced fiscal resources and burden sharing at the international level.

Keywords: International liquidity; Sovereign debt; Euro zone crisis; Fiscal union; International Monetary Fund; Special Drawing Rights

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2011 Bank of Japan All Rights Reserved.

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