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The Consequences of Banking Crises on Public Debt

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  • Davide Furceri

    ()
    (OECD and University of Palermo)

  • Aleksandra Zdzienicka

    ()
    (Université de Lyon, Lyon, F-69003, France; CNRS, GATE Lyon St Etienne, UMR 5824, 93, chemin des Mouilles, Ecully, F-69130, France; ENS-LSH, Lyon, France)

Abstract

The aim of this paper is to assess the consequences of banking crises on public debt. Using an unbalanced panel of 154 countries from 1980 to 2006, the paper shows that banking crises produce a significant and long-lasting increase in government debt. The effect is a function of the severity of the crisis. In particular, we find that for severe crises, comparable to the most recent one in terms of output losses, banking crises are followed by a medium-term increase of about 37 percentage points in the government gross debt-to-GDP ratio. We also find that the debt ratio increased more in smaller countries, with worse initial fiscal positions and with a lower quality of institutions (in terms of political stability and democracy). The increase in government debt is also a function of the size of the fiscal stimulus to counter the economic downturns and varies with the type of banking intervention policy, with liquidity support to banks associated with a larger increase in public debt.

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Bibliographic Info

Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 1015.

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Length: 31 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:gat:wpaper:1015

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Keywords: Output Growth; Financial Crisis; CEECs;

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References

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  1. Michael D. Bordo & Christopher M. Meissner, 2005. "The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997," NBER Working Papers 11897, National Bureau of Economic Research, Inc.
  2. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," Research Department Publications 4367, Inter-American Development Bank, Research Department.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-72, May.
  4. Ugo Panizza, 2008. "Domestic And External Public Debt In Developing Countries," UNCTAD Discussion Papers 188, United Nations Conference on Trade and Development.
  5. Davide, Furceri & Aleksandra, Zdzienicka, 2010. "Banking Crises and Short and Medium Term Output Losses in Developing Countries: The Role of Structural and Policy Variables," MPRA Paper 22078, University Library of Munich, Germany.
  6. Gerard Caprio & Patrick Honohan, 2008. "Banking Crises," Center for Development Economics 2008-09, Department of Economics, Williams College.
  7. Davide Furceri & Annabelle Mourougane, 2009. "Financial Crises: Past Lessons and Policy Implications," OECD Economics Department Working Papers 668, OECD Publishing.
  8. Christina D. Romer and David H. Romer., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Economics Working Papers 89-107, University of California at Berkeley.
  9. Schuknecht, Ludger & von Hagen, Jürgen & Wolswijk, Guido, 2007. "Government Risk Premiums in the Bond Market: EMU and Canada," CEPR Discussion Papers 6579, C.E.P.R. Discussion Papers.
  10. Davide Furceri & Annabelle Mourougane, 2009. "The Effect of Financial Crises on Potential Output: New Empirical Evidence from OECD Countries," OECD Economics Department Working Papers 699, OECD Publishing.
  11. Michael D. Bordo & Alberto F. Cavallo & Christopher M. Meissner, 2007. "Sudden Stops: Determinants and Output Effects in the First Era of Globalization, 1880-1913," NBER Working Papers 13489, National Bureau of Economic Research, Inc.
  12. Hutchison, Michael M & Noy, Ilan, 2005. "How Bad Are Twins? Output Costs of Currency and Banking Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(4), pages 725-52, August.
  13. Davide Furceri & Aleksandra Zdzienicka-Durand, 2011. "The Real Effect of Financial Crises in the European Transition Economies," Post-Print halshs-00431044, HAL.
  14. Gale, William G. & Orszag, Peter R., 2003. "Economic Effects of Sustained Budget Deficits," National Tax Journal, National Tax Association, vol. 56(3), pages 463-85, September.
  15. Teulings, Coen N & Zubanov, Nick, 2010. "Is Economic Recovery a Myth? Robust Estimation of Impulse Responses," CEPR Discussion Papers 7800, C.E.P.R. Discussion Papers.
  16. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
  17. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
  18. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, vol. 98(1), pages 439-57, March.
  19. Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market?," Economic Policy, CEPR & CES & MSH, vol. 24, pages 191-240, 04.
  20. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  21. Robert J. Barro, 2001. "Economic Growth in East Asia Before and After the Financial Crisis," NBER Working Papers 8330, National Bureau of Economic Research, Inc.
  22. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR & CES & MSH, vol. 18(37), pages 503-532, October.
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Citations

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Cited by:
  1. Reinhart, Carmen M. & Rogoff, Kenneth S., 2009. "The Aftermath of Financial Crises," Scholarly Articles 11129155, Harvard University Department of Economics.
  2. Maria Th. Kasselaki & Athanasios O. Tagkalakis, 2013. "Financial soundness indicators and financial crisis episodes," Working Papers 158, Bank of Greece.
  3. Furceri, Davide & Zdzienicka, Aleksandra, 2012. "How costly are debt crises?," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 726-742.
  4. Gabriele Galati & John Lewis & Steven Poelhekke & Chen Zhou, 2011. "Have market views on the sustainability of fiscal burdens influenced monetary authorities' credibility?," DNB Working Papers 304, Netherlands Central Bank, Research Department.
  5. Annabelle Mourougane & Davide Furceri, 2010. "Une lecture de la crise à la lumière des crises passées," Économie et Statistique, Programme National Persée, vol. 438(1), pages 19-42.
  6. Athanasios Tagkalakis, 2012. "The effects of financial crisis on fiscal positions," Working Papers 145, Bank of Greece.
  7. 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, vol. 61(3), pages 331-348, June.
  8. Steiner, Andreas, 2013. "How central banks prepare for financial crises – An empirical analysis of the effects of crises and globalisation on international reserves," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 208-234.
  9. Tagkalakis, Athanasios O., 2014. "Financial stability indicators and public debt developments," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 158-179.
  10. Luca Agnello & Davide Furceri & Ricardo M. Sousa, 2011. "Fiscal Policy Discretion, Private Spending, and Crisis Episodes," NIPE Working Papers 31/2011, NIPE - Universidade do Minho.
  11. Furceri, Davide & Guichard, Stéphanie & Rusticelli, Elena, 2012. "The effect of episodes of large capital inflows on domestic credit," The North American Journal of Economics and Finance, Elsevier, vol. 23(3), pages 325-344.
  12. Luca Agnello & Davide Furceri & Ricardo Sousa, 2013. "Discretionary Government Consumption, Private Domestic Demand, and Crisis Episodes," Open Economies Review, Springer, vol. 24(1), pages 79-100, February.
  13. Lorenzo E. Bernal-Verdugo & Davide Furceri & Dominique M. Guillaume, 2013. "The Dynamic Effect of Social and Political Instability on Output," IMF Working Papers 13/91, International Monetary Fund.
  14. Davide Furceri & Aleksandra Zdzienicka, 2013. "The Euro Area Crisis," IMF Working Papers 13/198, International Monetary Fund.

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