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How Effective is Fiscal Policy Response in Systemic Banking Crises?

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  • Sanjeev Gupta
  • Carlos Mulas-Granados
  • Emanuele Baldacci
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    Abstract

    This paper studies the effects of fiscal policy response in 118 episodes of systemic banking crisis in advanced and emerging market countries during 1980-2008. It finds that timely countercyclical fiscal measures contribute to shortening the length of crisis episodes by stimulating aggregate demand. Fiscal expansions that rely mostly on measures to support government consumption are more effective in shortening the crisis duration than those based on public investment or income tax cuts. But these results do not hold for countries with limited fiscal space where fiscal expansions are prevented by funding constraints. The composition of countercyclical fiscal responses matters as well for output recovery after the crisis, with public investment yielding the strongest impact on growth. These results suggest a potential trade-off between short-run aggregate demand support and medium-term productivity growth objectives in fiscal stimulus packages adopted in distress times.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/160.

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    Length: 0
    Date of creation: 01 Jul 2009
    Date of revision:
    Handle: RePEc:imf:imfwpa:09/160

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    Related research

    Keywords: Banking crisis; Banking sector; Banks; Developed countries; Developing countries; Economic models; External shocks; Fiscal analysis;

    This paper has been announced in the following NEP Reports:

    References

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    Cited by:
    1. M. Nautet & L. Van Meensel, 2011. "Economic impact of the public debt," Economic Review, National Bank of Belgium, issue II, pages 7-19, September.
    2. Bunea-Bontas, Cristina Aurora & Petre, Mihaela Cosmina, 2009. "Fiscal Policy during the current Crisis," MPRA Paper 18676, University Library of Munich, Germany.
    3. Zhiwei Zhang & Wenlang Zhang, 2009. "The Road to Recovery: Fiscal Stimulus, Financial Sector Rehabilitation, and Exit from Policy Easing," Working Papers 0918, Hong Kong Monetary Authority.
    4. Zhang, Zhiwei & Zhang, Wenlang, 2011. "The road to recovery: Fiscal stimulus, financial sector rehabilitation, and potential risks ahead," Journal of Asian Economics, Elsevier, vol. 22(4), pages 311-321, August.

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