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Financial Crises and the Composition of Public Finances: Evidence from OECD Countries

Author

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  • Markus Leibrecht

    (Henley Business School, Malaysia Campus)

  • Johann Scharler

    (University of Innsbruck)

Abstract

The effects that financial crises exert on public debt-to-GDP ratios have received substantial attention in policy circles and academia alike. We add to this discussion by exploring the impact of financial crises on the composition of public spending and tax revenues. Using the Jorda (2005) local projection approach and data from 23 advanced OECD countries, ranging from 1970 to 2016, we find that expenditures on social security and on interest payments increase relative to total spending, whereas the share of public investment expenditures declines in the aftermath of financial crises. This shift in expenditure composition mainly arises in highly financially developed economies. Our results are also indicative for a financial crisis-induced shift to more long-run economic growth-friendly types of revenues. However, this shift mainly occurs in less financially developed economies.

Suggested Citation

  • Markus Leibrecht & Johann Scharler, 2017. "Financial Crises and the Composition of Public Finances: Evidence from OECD Countries," ICMA Centre Discussion Papers in Finance icma-dp2017-04, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2017-04
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    More about this item

    Keywords

    Composition of public budgets; financial crisis; public debt;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

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