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The Consequences of Banking Crises for Public Debt

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  • Davide Furceri
  • Aleksandra Zdzienicka

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, 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. Measuring the increase in debt in this manner seems more appropriate than some of the measures used in the literature that have provided off-quoted and very large numbers for the run-up in debt. In addition, the debt ratio increased more in countries with a higher initial gross debt-to-GDP ratio and with a higher initial foreign debt-to-GDP ratio. Les conséquences des crises bancaires pour la dette publique L’objectif de ce document est de déterminer l’impact des crises bancaires sur la dette publique. Les résultats obtenus utilisant un panel non-cylindré de 154 pays sur la période 1980-2006 montrent que les crises bancaires provoquent une augmentation significative et persistante de la dette publique. Cet effet dépend de la sévérité de la crise. Plus précisément, les crises dont la sévérité est comparable à la crise la plus récente en termes de pertes de PIB augmentent la dette publique brute par rapport PIB d’environ 37 points de pourcentage à moyen terme. Cette approche semble être plus appropriée par rapport à celles utilisées dans la littérature qui centrées sur la dette publique elle-même rapportent l’impact beaucoup plus important des crises bancaires. De plus, l’impact des crises bancaires croît en fonction du niveau initial de la dette public et de la dette extérieur par rapport au PIB.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 801.

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Date of creation: 25 Aug 2010
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Handle: RePEc:oec:ecoaaa:801-en

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Keywords: public debt; financial crisis; banking crisis; crise bancaire; crise financière; dette publique;

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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.
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  17. Davide Furceri & Aleksandra Zdzienicka, 2009. "The Real Effect of Financial Crises in the European Transition Economies," Working Papers, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure 0920, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
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Citations

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Cited by:
  1. 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, Elsevier, vol. 23(3), pages 325-344.
  2. Maria Th. Kasselaki & Athanasios O. Tagkalakis, 2013. "Financial soundness indicators and financial crisis episodes," Working Papers, Bank of Greece 158, Bank of Greece.
  3. Furceri, Davide & Zdzienicka, Aleksandra, 2012. "How costly are debt crises?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(4), pages 726-742.
  4. Davide Furceri & Aleksandra Zdzienicka, 2013. "The Euro Area Crisis," IMF Working Papers 13/198, International Monetary Fund.
  5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," NBER Working Papers 14656, National Bureau of Economic Research, Inc.
  6. Athanasios Tagkalakis, 2012. "The effects of financial crisis on fiscal positions," Working Papers, Bank of Greece 145, Bank of Greece.
  7. Athanasios O. Tagkalakis, 2014. "Financial stability indicators and public debt developments," Working Papers, Bank of Greece 179, Bank of Greece.
  8. Luca Agnello & Davide Furceri & Ricardo M. Sousa, 2011. "Fiscal Policy Discretion, Private Spending, and Crisis Episodes," NIPE Working Papers, NIPE - Universidade do Minho 31/2011, NIPE - Universidade do Minho.
  9. Luca Agnello & Davide Furceri & Ricardo Sousa, 2013. "Discretionary Government Consumption, Private Domestic Demand, and Crisis Episodes," Open Economies Review, Springer, Springer, vol. 24(1), pages 79-100, February.
  10. 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, Netherlands Central Bank, Research Department 304, Netherlands Central Bank, Research Department.
  11. Annabelle Mourougane & Davide Furceri, 2010. "Une lecture de la crise à la lumière des crises passées," Économie et Statistique, Programme National Persée, Programme National Persée, vol. 438(1), pages 19-42.
  12. 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, Elsevier, vol. 33(C), pages 208-234.
  13. 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, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(3), pages 331-348, June.
  14. 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.

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