Banking Crises, Output Loss and Fiscal Policy

55 Pages Posted: 19 May 2010

See all articles by Werner Roeger

Werner Roeger

European Commission, DGECFIN

István P. Székely

European Commission, DGECFIN; Corvinus University of Budapest

Alessandro Turrini

European Commission; Centre for Economic Policy Research (CEPR)

Date Written: May 2010

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.

Keywords: Banking crises, DSGE models and financial market imperfections, fiscal policy

JEL Classification: E6, G01, H3

Suggested Citation

Roeger, Werner and Szekely, Istvan P. and Turrini, Alessandro, Banking Crises, Output Loss and Fiscal Policy (May 2010). CEPR Discussion Paper No. DP7815. Available at SSRN: https://ssrn.com/abstract=1611511

Werner Roeger (Contact Author)

European Commission, DGECFIN ( email )

Economic and Financial Affairs
BU1-3/159, 200 Rue de la Loi
B-1049 Brussels
Belgium

Istvan P. Szekely

European Commission, DGECFIN ( email )

CHAR 15/216
Brussels, Bruxelles B-1040
Belgium
+3222958674 (Phone)

Corvinus University of Budapest ( email )

Budapest
Hungary

HOME PAGE: http://www.uni-corvinus.hu/index.php?id=22061

Alessandro Turrini

European Commission ( email )

Office BU-10/113
B-1049 Brussels
Belgium
+32 2 299 5072 (Phone)
+32 2 299 3505 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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