The Consequences of Banking Crises for Public Debt
University of Palermo; Organization for Economic Co-Operation and Development (OECD)
University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)
March 25, 2010
Bank of Italy Occasional Paper
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 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 countries with a worse initial fiscal position (in terms of the gross debt to GDP ratio) and with a higher share of foreign debt.
Number of Pages in PDF File: 22
Keywords: Output Growth, Financial Crisis, CEECs
JEL Classification: G1, E6
Date posted: January 15, 2012
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