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Banking crises, Output Loss and Fiscal Policy

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  • Röger, Werner
  • Székely, Istvan
  • Turrini, Alessandro Antonio

Abstract

This paper analyses the role fiscal policy plays during banking crises in supporting short-term GDP growth and the growth potential. Using a database covering 56 advanced and emerging economies for the period 1970-2008, it is found that fiscal policy, whether it is expansionary or contractionary, appears to matter for the impact of banking crises on headline growth but not on potential output. The stronger expansionary impact of fiscal policy during banking crises does not seem to be driven by the fact that resources are largely underutilized in those periods. DSGE model simulations help provide an interpretation of these findings. If agents are constrained in their borrowing by the value of their collateral (e.g., Kiyotaki and Moore, 1997), fiscal multipliers during banking crises are higher because the fiscal expansion has the additional effect of increasing the value of the collateral constrained households have, thus boosting demand also via a relaxation of lending constraints by banks.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7815.

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Date of creation: May 2010
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Handle: RePEc:cpr:ceprdp:7815

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Keywords: Banking crises; DSGE models and financial market imperfections; fiscal policy;

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References

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  1. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
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  16. Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
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  20. Furceri, Davide & Mourougane, Annabelle, 2012. "The effect of financial crises on potential output: New empirical evidence from OECD countries," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 822-832.
  21. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
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Citations

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Cited by:
  1. J. Stephen Ferris, 2010. "Fiscal Policy from a Public Choice Perspective," Carleton Economic Papers 10-10, Carleton University, Department of Economics.
  2. Agustín S. Bénétrix & Philip R. Lane, 2010. "International Differences in Fiscal Policy During the Global Crisis," NBER Working Papers 16346, National Bureau of Economic Research, Inc.
  3. Meilan Yan & Maximilian J. B. Hall & Paul Turner, 2011. "A Cost-Benefit Analysis of Basel III: Some Evidence from the UK," Discussion Paper Series 2011_05, Department of Economics, Loughborough University, revised Nov 2011.
  4. Qazizada, W & Stockhammer, Engelbert, 2014. "Government spending multipliers in contraction and expansion," Economics Discussion Papers 2014-2, School of Economics, Kingston University London.
  5. Afonso, António & Grüner, Hans Peter & Kolerus, Christina, 2010. "Fiscal policy and growth: do financial crises make a difference?," Working Paper Series 1217, European Central Bank.
  6. Tommaso Ferraresi & Andrea Roventini & Giorgio Fagiolo, 2013. "Fiscal Policies and Credit Regimes: A TVAR Approach," Working Papers 03/2013, University of Verona, Department of Economics.

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