Fiscal Policy and Financial Development

This publication examines the financial systems of middle income countries, particularly the effects of public borrowing from the domestic banking sector on financial divelopment. This is particularly salient as the share of bank credit used by the public sector in these countries has increased over time. The authors argue this endangers high rates of financial growth, and may hamper further development in the financial system. This increases the costs of fiscal proliicary, particularly because domestic banks that lend to the government are more profitable, but often less efficient.