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Fiscal Policy and Financial Development

  • David Hauner

We examine the effects of public sector borrowing from the domestic banking system on financial development in middle-income countries. While these countries'' external debt has been falling, the share of bank credit absorbed by the public sector has been rising rapidly. We argue that this runs the risk of slowing financial development by affecting structural characteristics of the banking systems. We find empirical evidence that too much public sector borrowing harms financial deepening, and that banks mainly lending to the public sector tend to be more profitable but less efficient. We note that these effects add to the costs of fiscal prolificacy.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/26.

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Length: 26
Date of creation: 01 Jan 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/26
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  1. Lucía Cuadro Sáez & Sonsoles Gallego Herrero & Alicia García Herrero, 2003. "Why Do Countries Develop More Financially Than Others? The Role Of The Central Bank And Banking Supervision," Finance 0304006, EconWPA.
  2. Bencivenga, V.R. & Smith, B.D., 1990. "Deficits, Inflation, And The Banking System In Developing Countries: The Optimal Degree Of Financial Repression," RCER Working Papers 214, University of Rochester - Center for Economic Research (RCER).
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  8. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  9. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
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  11. Peter J. Montiel, 2003. "Development of Financial Markets and Macroeconomic Policy," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 12(Supplemen), pages 12-52, September.
  12. Demirguc-Kunt, Asli & Laeven, Luc & Levine, Ross, 2004. "Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 593-622, June.
  13. Michael Kumhof & Evan Tanner, 2005. "Government Debt; A Key Role in Financial Intermediation," IMF Working Papers 05/57, International Monetary Fund.
  14. Claessens, Stijn & Laeven, Luc, 2002. "Financial Development, Property Rights and Growth," CEPR Discussion Papers 3295, C.E.P.R. Discussion Papers.
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  16. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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  21. Poonam Gupta & Thierry Tressel & Enrica Detragiache, 2005. "Finance in Lower Income Countries; An Empirical Exploration," IMF Working Papers 05/167, International Monetary Fund.
  22. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
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  27. Cottarelli, Carlo & Dell'Ariccia, Giovanni & Vladkova-Hollar, Ivanna, 2005. "Early birds, late risers, and sleeping beauties: Bank credit growth to the private sector in Central and Eastern Europe and in the Balkans," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 83-104, January.
  28. Joshua Aizenman & Ilan Noy, 2003. "Endogenous Financial Openness: Efficiency and Political Economy Considerations," NBER Working Papers 10144, National Bureau of Economic Research, Inc.
  29. Goddard, John & Molyneux, Phil & Wilson, John O S, 2004. "Dynamics of Growth and Profitability in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1069-90, December.
  30. Ashok Vir Bhatia, 2002. "Sovereign Credit Ratings Methodology; An Evaluation," IMF Working Papers 02/170, International Monetary Fund.
  31. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
  32. Manmohan S. Kumar & Pablo Emilio Guidotti, 1991. "Domestic Public Debt of Externally Indebted Countries," IMF Occasional Papers 80, International Monetary Fund.
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