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Public debt and financial crises in the twentieth century

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  • Schularick, Moritz

Abstract

The costs of wars have been the main driver of public debt in the Western World during the modern era. The late twentieth century stands out as a period that saw a pronounced increase of government debt to GDP ratios in peacetime. This paper assesses the role that financial crises have played in shaping the public debt trajectory in the twentieth century. Focusing on the experiences of 14 industrial economies, I show that financial crises have long and lasting effects on public finances. I provide evidence that the costs of financial crises have increased strongly in the second half of the twentieth century and that the costs of financial crises grow with the size of the financial sector. In many countries, the rising costs incurred from stabilizing the economy after financial crises were an important cause of the peacetime surge of public debt ratios in the late twentieth century. In today's highly financialized economies, financial crises have become a key risk for public finances. --

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Bibliographic Info

Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2012/1.

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Date of creation: 2012
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Handle: RePEc:zbw:fubsbe:20121

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  1. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2011. "When credit bites back: leverage, business cycles, and crises," Working Paper Series, Federal Reserve Bank of San Francisco 2011-27, Federal Reserve Bank of San Francisco.
  2. Obstfeld, Maurice, 1998. "The Global Capital Market: Benefactor or Menace?," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt3kn3n2s8, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Klingebiel, Daniela & Kroszner, Randall S & Laeven, Luc, 2006. "Banking Crises, Financial Dependence and Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5623, C.E.P.R. Discussion Papers.
  4. Reinhart, Carmen & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7661, C.E.P.R. Discussion Papers.
  5. Ritschl, Albrecht, 1996. "Sustainability of High Public Debt: What the Historical Record Shows," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1357, C.E.P.R. Discussion Papers.
  6. Teulings, Coen N & Zubanov, Nick, 2010. "Is Economic Recovery a Myth? Robust Estimation of Impulse Responses," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7800, C.E.P.R. Discussion Papers.
  7. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2011. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Working Papers, Becker Friedman Institute for Research In Economics 2012-004, Becker Friedman Institute for Research In Economics.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
  9. Reinhart, Carmen M. & Rogoff, Kenneth S., 2009. "The Aftermath of Financial Crises," Scholarly Articles 11129155, Harvard University Department of Economics.
  10. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 16(32), pages 51-82, 04.
  11. Acharya, Viral V & Drechsler, Itamar & Schnabl, Philipp, 2011. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8679, C.E.P.R. Discussion Papers.
  12. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2010. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," NBER Working Papers 16567, National Bureau of Economic Research, Inc.
  13. Carmen M. Reinhart & Vincent R. Reinhart, 2010. "After the Fall," NBER Working Papers 16334, National Bureau of Economic Research, Inc.
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Cited by:
  1. 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.

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