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Fiscal policy and the duration of financial crises

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  • CRAIGWELL, ROLAND
  • Lorde, Troy
  • Moore, Winston

Abstract

Financial systems across the world have all come under pressure due to the on-going financial crisis. One of the most often asked questions during a collapse is how long and how deep will the decline be as well as what policy initiatives can be employed to shorten the recession. This study estimates a model of the duration of financial crises in an attempt to identify whether fiscal policy can reduce the time to recovery. The results suggest that fiscal shocks, which could provoke an overreaction on the part of markets, tend to lengthen crisis duration. Significant nonlinear effects of government spending are also reported in relation to trade openness and financial openness.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40836.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:40836

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Keywords: financial crises; fiscal policy; duration models; financial system;

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  1. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers, International Monetary Fund 08/224, International Monetary Fund.
  2. Graciela L. Kaminsky & Carmen Reinhart & Carlos A. Vegh, 2003. "The Unholy Trinity of Financial Contagion," NBER Working Papers, National Bureau of Economic Research, Inc 10061, National Bureau of Economic Research, Inc.
  3. Abdullah Mamun & M. Kabir Hassan & Mark Johnson, 2010. "How did the Fed do? An empirical assessment of the Fed's new initiatives in the financial crisis," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 20(1-2), pages 15-30.
  4. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, Elsevier, vol. 41(3-4), pages 351-366, November.
  5. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, Elsevier, vol. 81(1), pages 163-192, October.
  6. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 544, Board of Governors of the Federal Reserve System (U.S.).
  7. Ratna Sahay & Deepak Mishra & Poonam Gupta, 2003. "Output Response to Currency Crises," IMF Working Papers, International Monetary Fund 03/230, International Monetary Fund.
  8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  9. Didier, Tatiana & Mauro, Paolo & Schmukler, Sergio L., 2008. "Vanishing financial contagion?," Journal of Policy Modeling, Elsevier, Elsevier, vol. 30(5), pages 775-791.
  10. Saubhik Deb, 2006. "Trade First and Trade Fast: A Duration Analysis of Recovery from Currency Crisis," Departmental Working Papers, Rutgers University, Department of Economics 200607, Rutgers University, Department of Economics.
  11. Aizenman, Joshua & Marion, Nancy P. & Marion, Nancy P., 1993. "Macroeconomic uncertainty and private investment," Economics Letters, Elsevier, Elsevier, vol. 41(2), pages 207-210.
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