Advanced Search
MyIDEAS: Login

How Effective is Fiscal Policy Response in Systemic Banking Crises?

Contents:

Author Info

  • Sanjeev Gupta
  • Carlos Mulas-Granados
  • Emanuele Baldacci

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=23130
Download Restriction: no

Bibliographic Info

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

as in new window
Length: 38
Date of creation: 01 Jul 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/160

Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Email:
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC

Order Information:
Web: http://www.imf.org/external/pubs/pubs/ord_info.htm

Related research

Keywords: Banking crisis; Banking sector; Banks; Developed countries; Developing countries; Economic models; External shocks; Fiscal analysis; banking; fiscal policy; banking crises; tax revenue; fiscal expansions; expansionary fiscal; expansionary fiscal policy; fiscal expansion; budget composition; budget balance; aggregate demand; fiscal conditions; public debt; fiscal policy response; fiscal stimulus; fiscal multipliers; fiscal space; government spending; fiscal policies; fiscal variables; tax reductions; fiscal deficits; fiscal response; banking panics; fiscal policy responses; fiscal balance; fiscal performance; fiscal measures; systemic banking crisis; current expenditure; fiscal package; tax revenues; public finances; discretionary fiscal policy; fiscal stimulus package; macroeconomic stability; fiscal stance; public expenditure; fiscal deficit; tax cuts; government expenditures; expansionary fiscal policies; fiscal data; fiscal sustainability; banking system; recapitalization; fiscal aggregates; fiscal institutions; fiscal policy instruments; budget measures; public spending; fiscal indicators; taxation; bank involvement; fiscal affairs department; bank closures; fiscal position; bank soundness; fiscal theory; fiscal discipline; fiscal risks; general budget; bank deposits; fiscal retrenchments; bank regulation; fiscal consolidation episodes; fiscal costs; fiscal consolidation; bank insolvencies; fiscal adjustments; bank runs; budget deficits; bank policy; bank recapitalization; high tax burdens; government expenditure; size of multipliers; primary budget balance; banking sector problems; public expenditures; fiscal implications; fiscal affairs; fiscal consolidations; banking system distress; revenue collection;

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Jordi Galí & J. David López Salido & Javier Vallés, 2003. "Understanding the effects of government spending on consumption," Banco de Espa�a Working Papers 0321, Banco de Espa�a.
  2. Ardagna, Silvia & Alesina, Alberto & Perotti, Roberto & Schiantarelli, Fabio, 2002. "Fiscal Policy, Profits, and Investment," Scholarly Articles 3353756, Harvard University Department of Economics.
  3. Eduardo A. Cavallo & Patricio Valenzuela, 2007. "The Determinants of Corporate Risk in Emerging Markets," IMF Working Papers 07/228, International Monetary Fund.
  4. Habib Ahmed & Stephen M. Miller, 1999. "Crowding-Out and Crowding-In Effects of the Components of Government Expenditure," Working papers 1999-02, University of Connecticut, Department of Economics.
  5. Bernardin Akitoby & Thomas Stratmann, 2008. "Fiscal Policy and Financial Markets," Economic Journal, Royal Economic Society, vol. 118(533), pages 1971-1985, November.
  6. H. Ahmed & SM. Miller, 2000. "Crowding-out and crowding-in effects of the components of government expenditure," Contemporary Economic Policy, Western Economic Association International, vol. 18(1), pages 124-133, 01.
  7. Manmohan S. Kumar & Dennis P. J. Botman, 2006. "Fundamental Determinants of the Effects of Fiscal Policy," IMF Working Papers 06/72, International Monetary Fund.
  8. Sanjeev Gupta & Emanuele Baldacci & Benedict Clements & Erwin R. Tiongson, 2005. "What sustains fiscal consolidations in emerging market countries?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 307-321.
  9. Dell'Ariccia, Giovanni & Detragiache, Enrica & Rajan, Raghuram, 2008. "The real effect of banking crises," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 89-112, January.
  10. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  11. Marco Terrones & M. Ayhan Kose & Stijn Claessens, 2008. "What Happens During Recessions, Crunches, and Busts?," IMF Working Papers 08/274, International Monetary Fund.
  12. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
  13. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," NBER Working Papers 14656, National Bureau of Economic Research, Inc.
  14. Uribe, Martín, 2002. "A fiscal theory of sovereign risk," Working Paper Series 0187, European Central Bank.
  15. Balduzzi, Pierluigi & Corsetti, Giancarlo & Foresi, Silverio, 1997. "Yield-curve movements and fiscal retrenchments," European Economic Review, Elsevier, vol. 41(9), pages 1675-1685, December.
  16. Schiantarelli, Fabio & Perotti, Roberto & Ardagna, Silvia & Alesina, Alberto, 2002. "Fiscal Policy, Profits, and Investment," Scholarly Articles 4685103, Harvard University Department of Economics.
  17. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  18. Reinhart, Carmen M. & Rogoff, Kenneth S., 2009. "The Aftermath of Financial Crises," Scholarly Articles 11129155, Harvard University Department of Economics.
  19. Luis Ignacio Jácome, 2008. "Central Bank Involvement in Banking Crises in Latin America," IMF Working Papers 08/135, International Monetary Fund.
  20. Gali, Jordi, 1994. "Government size and macroeconomic stability," European Economic Review, Elsevier, vol. 38(1), pages 117-132, January.
  21. Sanjeev Gupta & Amine Mati & Emanuele Baldacci, 2008. "Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets," IMF Working Papers 08/259, International Monetary Fund.
  22. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  23. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  24. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR & CES & MSH, vol. 16(32), pages 51-82, 04.
  25. Charles W. Calomiris & Gary Gorton, . "The Origins of Banking Panics: Models, Facts, and Bank Regulation," Rodney L. White Center for Financial Research Working Papers 11-90, Wharton School Rodney L. White Center for Financial Research.
  26. Adriana Arreaza & Bent E. Sorensen & Oved Yosha, 1998. "Consumption Smoothing through Fiscal Policy in OECD and EU Countries," NBER Working Papers 6372, National Bureau of Economic Research, Inc.
  27. G. Russell Kincaid & Charles Collyns, 2003. "Managing Financial Crises," IMF Occasional Papers 217, International Monetary Fund.
  28. Afonso, António & Strauch, Rolf, 2004. "Fiscal policy events and interest rate swap spreads: evidence from the EU," Working Paper Series 0303, European Central Bank.
  29. 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.
  30. Antonio Spilimbergo & Steve Symansky & Olivier Blanchard & Carlo Cottarelli, 2009. "Fiscal Policy For The Crisis," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 10(2), pages 26-32, 07.
  31. Tavares, Jose & Valkanov, Rossen, 2001. "The neglected effect of fiscal policy on stock and bond returns," FEUNL Working Paper Series wp413, Universidade Nova de Lisboa, Faculdade de Economia.
  32. Eduardo A. Cavallo & Patricio Valenzuela, 2007. "The Determinants of Corporate Risk in Emerging Markets: An Option-Adjusted Spread Analysis," Research Department Publications 4513, Inter-American Development Bank, Research Department.
  33. Adriana Arreaza & Bent E. Sgrensen & Oved Yosha, 1999. "Consumption Smoothing through Fiscal Policy in OECD and EU Countries," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 59-80 National Bureau of Economic Research, Inc.
  34. Durbin, Erik & Ng, David T.C., 2002. "The Sovereign Ceiling and Emerging Market Corporate Bond Spreads," Working Papers 127286, Cornell University, Department of Applied Economics and Management.
  35. Edward J. Frydl, 1999. "The Length and Cost of Banking Crises," IMF Working Papers 99/30, International Monetary Fund.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:09/160. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.