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The effects of financial crisis on fiscal positions

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  • Tagkalakis, Athanasios

Abstract

The recent financial crisis was characterized by the sizeable fiscal cost of banking sector bail out operations and the significant automatic and discretionary fiscal policy response to shrinking output, which have put increased pressure on public finances in many industrialized countries. This paper tries to evaluate the impact of financial crisis episodes on debt developments. The findings indicate that severe financial crisis episodes increase the stock of debt by 2.7%–4.0% of GDP, on average in the 20 OECD countries examined. Ιn countries with big financial sectors it ranges from 4.2%–5.3% of GDP and in countries with smaller financial sectors it is about 1.4%–1.7% of GDP. The primary balance and the cyclically adjusted fiscal policy stance ease by about 2.6% of GDP and 1.6% of potential GDP, respectively, in the event of a severe financial market crash. Expansionary fiscal interventions are more pronounced in countries with sizable financial sectors. I find significant evidence that a financial market collapse paves the way for a subsequent deterioration in debt ratios.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 29 (2013)
Issue (Month): C ()
Pages: 197-213

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Handle: RePEc:eee:poleco:v:29:y:2013:i:c:p:197-213

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Web page: http://www.elsevier.com/locate/inca/505544

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Keywords: Fiscal policy; Public debt; Financial crisis;

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Citations

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Cited by:
  1. Maria Th. Kasselaki & Athanasios O. Tagkalakis, 2013. "Financial soundness indicators and financial crisis episodes," Working Papers, Bank of Greece 158, Bank of Greece.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," NBER Working Papers 14656, National Bureau of Economic Research, Inc.
  3. Athanasios Tagkalakis, 2012. "The effects of financial crisis on fiscal positions," Working Papers, Bank of Greece 145, Bank of Greece.
  4. Rossana Merola & Javier J. Pérez, 2012. "Fiscal forecast errors: governments vs independent agencies?," Banco de Espa�a Working Papers 1233, Banco de Espa�a.
  5. Hauck, Achim & Vollmer, Uwe, 2013. "Emergency liquidity provision to public banks: Rules versus discretion," European Journal of Political Economy, Elsevier, Elsevier, vol. 32(C), pages 193-204.
  6. Mikhail Stolbov, 2014. "How Are Interbank and Sovereign Debt Markets Linked? Evidence from 14 OECD Countries, the Euro Area and Russia," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(3), pages 331-348, June.
  7. Greg Hannsgen & Dimitri B. Papadimitriou, 2012. "Fiscal Traps and Macro Policy after the Eurozone Crisis," Economics Public Policy Brief Archive ppb_127, Levy Economics Institute.

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