Do Bank Crises or Fiscal Imbalances Hinder Long-Run Growth? Empirical Evidence from Panel Data
International Journal of Economic Research, Forthcoming
19 Pages Posted: 2 May 2011
Date Written: May 1, 2011
In this paper, we consider the long-term effects on economic output of fiscal deficits and banking crises. Using an unbalanced panel of thousands of annual observations from 169 countries around the world, we find very limited evidence that (average) banking crises have either statistically significant or substantial effects on GDP growth five years after their onset. The evidence for deficits is mixed, such that deficit spending seems to have negative impacts on long-term growth only if performed in a pro-cyclical fashion; counter-cyclical deficits have either a much smaller negative impact, or in fact a positive impact, depending on the sub-sample of countries examined, although generally not statistically significant in either case. We further find that the effect of deficits on growth varies substantially by income category and by geographical region. Finally, we find no consistent evidence for a "catch-up" effect, whereby countries with lower incomes are postulated to grow at higher rates.
Keywords: deficits, financial crises, economic development
JEL Classification: G21, G28
Suggested Citation: Suggested Citation