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The Consequences of Banking Crises for Public Debt

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  • Davide Furceri

    (OCDE - Organisation de coopération et de développement économiques - OCDE)

  • Aleksandra Zdzienicka-Durand

    (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)

Abstract

The aim of this paper is to assess the consequences of banking crises for public debt. Using an unbalanced panel of 154 countries from 1980 to 2006, the paper shows that banking crises are associated with 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 countries with a worse initial fiscal position (in terms of the gross debt-to-GDP ratio) and with a higher share of foreign debt.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00497925.

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Date of creation: 2010
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Handle: RePEc:hal:journl:halshs-00497925

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Keywords: Output Growth; Financial Crisis; CEECs;

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References

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  1. Davide Furceri & Aleksandra Zdzienicka, 2010. "Banking Crises and Short and Medium Term Output Losses in Developing Countries: The Role of Structural and Policy Variables," Working Papers 1014, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  2. Gerard Caprio & Patrick Honohan, 2008. "Banking Crises," Center for Development Economics 2008-09, Department of Economics, Williams College.
  3. Davide Furceri & Annabelle Mourougane, 2009. "Financial Crises: Past Lessons and Policy Implications," OECD Economics Department Working Papers 668, OECD Publishing.
  4. 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.
  5. 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.
  6. 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.
  7. Michael Hutchison & Ilan Noy, 2002. "How bad are twins? output costs of currency and banking crises," Pacific Basin Working Paper Series 2002-02, Federal Reserve Bank of San Francisco.
  8. Coenraad N. Teulings & Nick Zubanov, 2010. "Is Economic Recovery a Myth? Robust Estimation of Impulse Responses," CESifo Working Paper Series 3027, CESifo Group Munich.
  9. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  10. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  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. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," IDB Publications 6516, Inter-American Development Bank.
  13. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," NBER Working Papers 14656, National Bureau of Economic Research, Inc.
  14. Valerie Cerra & Sweta Chaman Saxena, 2007. "Growth dynamics: the myth of economic recovery," BIS Working Papers 226, Bank for International Settlements.
  15. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Working Papers 2966, National Bureau of Economic Research, Inc.
  16. Davide Furceri & Aleksandra Zdzienicka, 2011. "The real effect of financial crises in the European transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 19(1), pages 1-25, 01.
  17. 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.
  18. 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.
  19. Ugo Panizza, 2008. "Domestic And External Public Debt In Developing Countries," UNCTAD Discussion Papers 188, United Nations Conference on Trade and Development.
  20. 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.
  21. 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.
  22. 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.
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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. Davide Furceri & Aleksandra Zdzienicka, 2011. "How Costly Are Debt Crises?," IMF Working Papers 11/280, International Monetary Fund.
  3. 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.
  4. Tagkalakis, Athanasios, 2013. "The effects of financial crisis on fiscal positions," European Journal of Political Economy, Elsevier, vol. 29(C), pages 197-213.
  5. 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.
  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, vol. 61(3), pages 331-348, June.
  7. Davide Furceri & Aleksandra Zdzienicka, 2013. "The Euro Area Crisis," IMF Working Papers 13/198, International Monetary Fund.
  8. Agnello, L. & Furceri, D. & R.M, Sousa., 2011. "Fiscal Policy Discretion, Private Spending, and Crisis Episodes," Working papers 354, Banque de France.
  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. Maria Th. Kasselaki & Athanasios O. Tagkalakis, 2013. "Financial soundness indicators and financial crisis episodes," Working Papers 158, Bank of Greece.
  11. Davide Furceri & Stéphanie Guichard & Elena Rusticelli, 2011. "The Effect of Episodes of Large Capital Inflows on Domestic Credit," OECD Economics Department Working Papers 864, OECD Publishing.
  12. 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.
  13. 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.
  14. 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.

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