An Integrated Approach to Government Financial Policy

In this paper, I address three questions of government financial policy: how should a government’s aversion to financial risk be determined, when are new financial investments justified, and what is the optimal level of reserves in a flexible exchange rate regime. To answer these questions, I modify an integrated financial model developed by Froot and Stein (1998) to describe private sector financial policy. Financial risk aversion in this model is due to the potential of poor financial returns limiting an institution’s future investment opportunities. The potential for poor returns provides governments with incentives to hold reserves and limit new financial investments.

Applying a simple measure of good governance to the debate on fiscal decentralization

Debates about the appropriate role, policies, and institutions of the state are often hampered by the lack of a definition for good government. To provide a quantifiable measure of good government, the authors develop an index for the quality of governance for a sample of 80 countries. They apply the index to the debate on the appropriate level of fiscal decentralization. In measuring the quality of governance, the authors develop indices for the government's ability to: a) Ensure political transparency and a voice for all citizens (the citizen participation index measures political freedom and political stability). b) Provide effective public services efficiently (the government orientation index measures judicial and bureaucratic efficiency and the absence of corruption). c) Promote the health and well-being of its citizens (the social development index measures human development and equitable distribution of income). d) Create a favorable climate for stable economic growth (the economic management index measures outward orientation, independence of the central bank, and an inverted debt-to-GDP ratio). In relating the index of governance quality to degree of fiscal decentralization for the 80 countries, the authors are not surprised to find a positive relationship between fiscal decentralization and quality of governance. But the strength of the correlation is surprising.Banks&Banking Reform,Decentralization,Municipal Financial Management,Economic Theory&Research,Health Economics&Finance,Municipal Financial Management,National Governance,Governance Indicators,Economic Theory&Research,Banks&Banking Reform

Una medición sencilla de la calidad del buen gobierno y su aplicación al debate sobre el nivel apropiado sobre descentralización fiscal

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