Advances in Economics and Business Vol. 5(6), pp. 328 - 333
DOI: 10.13189/aeb.2017.050603
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Fiscal Imbalance, Risk Premium and Financial Crisis - An Analysis of the Argentinean Crisis


Esha Ajmera *
Indian Institute of Management Lucknow, India

ABSTRACT

This paper shows how fiscal imbalance and excessive external borrowing may lead to a financial crisis. The trigger of the crisis is substantial increase in risk premium as a result of persistent budget deficits. This results in hyper depreciation of exchange rate, which causes an adverse balance sheet effect on investment in the presence of external commercial borrowings. This leads to a contraction of output and the country enters into recession. Furthermore, policy prescriptions are provided to curtail the crisis. The situation in Argentina is analysed in the light of this model.

KEYWORDS
Fiscal Imbalance, Risk Premium, Balance Sheet Effect, Recession

Cite this paper
Esha Ajmera . "Fiscal Imbalance, Risk Premium and Financial Crisis - An Analysis of the Argentinean Crisis." Advances in Economics and Business 5.6 (2017) 328 - 333. doi: 10.13189/aeb.2017.050603.