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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

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: 38
Date of creation: 01 Jul 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/160

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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;

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References

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