Template-Type: ReDIF-Paper 1.0
Author-Name: Fabrizio Zampolli
Author-X-Name-First: Fabrizio
Author-X-Name-Last: Zampolli
Title: Financial stability limits on fiscal space
Abstract: Conventional indicators of fiscal sustainability, such as the interest rate-growth differential that focus on long-term drivers do not always incorporate fluctuating financial conditions and risk. This paper proposes an analytical framework in which sovereign borrowing costs depend on the balance-sheet capacity of financial intermediaries, where financial amplification can generate an endogenously tighter debt limit even in the absence of fiscal fatigue or explicit default risk. Fiscal space becomes state-contingent: identical yield shocks compress fiscal space more strongly when the economy is closer to its debt limit. We examine four financial amplification mechanisms: the bank-sovereign nexus, "original sin redux" , duration matching, and deleveraging in repo markets.
Creation-Date: 2026-03
File-URL: https://www.bis.org/publ/work1339.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1339.htm
File-Format: text/html
Number: 1339
Keywords: fiscal sustainability, fiscal space, debt limit, financial stability, sovereign bond market, non-bank financial institutions
Classification-JEL: E43, E44, E62, G23, H63
Handle: RePEc:bis:biswps:1339