The Consequences of Banking Crises for Public Debt

38 Pages Posted: 5 Aug 2010

See all articles by Aleksandra Zdzienicka

Aleksandra Zdzienicka

International Monetary Fund (IMF)

Davide Furceri

University of Palermo; Organization for Economic Co-Operation and Development (OECD)

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Date Written: August 5, 2010

Abstract

The aim of this paper is to assess the consequences of banking crises for public debt. Using an unbalanced panel of 154 countries from 1980 to 2006, the paper shows that banking crises are associated with a significant and longlasting increase in government debt. The effect is a function of the severity of the crisis. In particular, 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. In addition, the debt ratio increased more in countries with higher initial gross debt-to-GDP ratio, with a higher share of foreign debt, 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 used.

Keywords: Public Debt, Financial Crises

JEL Classification: G1, E6

Suggested Citation

Zdzienicka, Aleksandra and Furceri, Davide, The Consequences of Banking Crises for Public Debt (August 5, 2010). Available at SSRN: https://ssrn.com/abstract=1653834 or http://dx.doi.org/10.2139/ssrn.1653834

Aleksandra Zdzienicka

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Davide Furceri (Contact Author)

University of Palermo ( email )

Viale delle Scienza
Palermo, Palermo 90128
Italy

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

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