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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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Bibliographic Info

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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Related research

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

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References

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  1. Sweta Chaman Saxena & Valerie Cerra, 2005. "Growth Dynamics: The Myth of Economic Recovery," IMF Working Papers 05/147, International Monetary Fund.
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Citations

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Cited by:
  1. Bénétrix, Agustín & Lane, Philip R., 2010. "International Differences in Fiscal Policy During the Global Crisis," CEPR Discussion Papers 8009, C.E.P.R. Discussion Papers.
  2. Tommaso Ferraresi & Andrea Roventini & Giorgio Fagiolo, 2013. "Fiscal Policies and Credit Regimes: A TVAR Approach," LEM Papers Series 2013/03, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  3. 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.
  4. J. Stephen Ferris, 2010. "Fiscal Policy from a Public Choice Perspective," Carleton Economic Papers 10-10, Carleton University, Department of Economics.
  5. 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.

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