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Banking crises, Output Loss and Fiscal Policy

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  • Székely, István P.
  • Turrini, Alessandro
  • Röger, Werner

Abstract

This paper analyses the role fiscal policy plays during banking crises in supporting short-term GDP growth and the growth potential. Using a database covering 56 advanced and emerging economies for the period 1970-2008, it is found that fiscal policy, whether it is expansionary or contractionary, appears to matter for the impact of banking crises on headline growth but not on potential output. The stronger expansionary impact of fiscal policy during banking crises does not seem to be driven by the fact that resources are largely underutilized in those periods. DSGE model simulations help provide an interpretation of these findings. If agents are constrained in their borrowing by the value of their collateral (e.g., Kiyotaki and Moore, 1997), fiscal multipliers during banking crises are higher because the fiscal expansion has the additional effect of increasing the value of the collateral constrained households have, thus boosting demand also via a relaxation of lending constraints by banks.

Suggested Citation

  • Székely, István P. & Turrini, Alessandro & Röger, Werner, 2010. "Banking crises, Output Loss and Fiscal Policy," CEPR Discussion Papers 7815, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7815
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    Cited by:

    1. Lane, Philip & ,, 2010. "International Differences in Fiscal Policy During the Global Crisis," CEPR Discussion Papers 8009, C.E.P.R. Discussion Papers.
    2. António Afonso & Hans Peter Grüner & Christina Kolerus, 2010. "Fiscal Policy and Growth: Do Financial Crises make a Difference?," Working Papers Department of Economics 2010/10, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    3. Engelbert Stockhammer & Collin Constantine & Severin Reissl, 2020. "Explaining the Euro crisis: current account imbalances, credit booms and economic policy in different economic paradigms," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 43(2), pages 231-266, April.
    4. Chalermchatvichien, Pichaphop & Jumreornvong, Seksak & Jiraporn, Pornsit, 2014. "Basel III, capital stability, risk-taking, ownership: Evidence from Asia," Journal of Multinational Financial Management, Elsevier, vol. 28(C), pages 28-46.
    5. Piotr Bańbuła & Arkadiusz Kotuła & Agnieszka Paluch & Mateusz Pipień & Piotr Wdowiński, 2019. "Optimal level of capital in the Polish banking sector," NBP Working Papers 312, Narodowy Bank Polski.
    6. J. Stephen Ferris, 2010. "Fiscal Policy from a Public Choice Perspective," Carleton Economic Papers 10-10, Carleton University, Department of Economics.
    7. Tommaso Ferraresi & Andrea Roventini & Giorgio Fagiolo, 2015. "Fiscal Policies and Credit Regimes: A TVAR Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(7), pages 1047-1072, November.
    8. W. Qazizada & E. Stockhammer, 2015. "Government spending multipliers in contraction and expansion," International Review of Applied Economics, Taylor & Francis Journals, vol. 29(2), pages 238-258, March.
    9. Yan, Meilan & Hall, Maximilian J.B. & Turner, Paul, 2012. "A cost–benefit analysis of Basel III: Some evidence from the UK," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 73-82.

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    More about this item

    Keywords

    Banking crises; Dsge models and financial market imperfections; Fiscal policy;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G01 - Financial Economics - - General - - - Financial Crises
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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