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The Consequences of Banking Crises on Public Debt

Author

Listed:
  • Davide Furceri

    (OCDE / OECD - Organisation de Coopération et de Développement Economiques = Organisation for Economic Co-operation and Development)

  • Aleksandra Zdzienicka-Durand

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - Université de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

Abstract

The aim of this paper is to assess the consequences of banking crises on public debt. Using an unbalanced panel of 154 countries from 1980 to 2006, the paper shows that banking crises produce a significant and long-lasting increase in government debt. The effect is a function of the severity of the crisis. In particular, we find that 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. We also find that the debt ratio increased more in smaller countries, with worse initial fiscal positions and with a lower quality of institutions (in terms of political stability and democracy). The increase in government debt is also a function of the size of the fiscal stimulus to counter the economic downturns and varies with the type of banking intervention policy, with liquidity support to banks associated with a larger increase in public debt.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Davide Furceri & Aleksandra Zdzienicka-Durand, 2010. "The Consequences of Banking Crises on Public Debt," Post-Print halshs-00492865, HAL.
    • Handle: RePEc:hal:journl:halshs-00492865
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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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