Getting it Right: How Fiscal Response Can Shorten Crisis Length and Raise Growth

18 Pages Posted: 15 Jan 2012

See all articles by Emanuele Baldacci

Emanuele Baldacci

International Monetary Fund (IMF) - Fiscal Affairs Department

Sanjeev Gupta

International Monetary Fund (IMF) - Fiscal Affairs Department

Carlos Mulas-Granados

Government of the Kingdom of Spain - Economic Bureau of the President

Date Written: March 25, 2010

Abstract

The authors use an ordered logit model to assess the effects of fiscal stimulus packages during episodes of systemic banking crisis in advanced and emerging market countries over the period 1980-2008. The results show that timely countercyclical fiscal measures can help shorten crises by boosting aggregate demand and offsetting the collapse of private investments. Nevertheless, these outcomes are weaker for countries with limited budgetary room and where fiscal expansion is prevented by funding constraints or limited access to markets. The composition of fiscal responses is important: fiscal expansions based on government consumption and income tax cut are more effective in shortening the recession, while a larger share of public investment yields the strongest impact on output growth. These findings suggest a potential trade off between short-run aggregate demand support and medium-term productivity growth objectives. Two stylised facts emerge: i) the fiscal measures enacted by G-20 countries may have curtailed the crisis by up to one year and ii) they may have stimulated post-crisis growth by 1 per cent of GDP compared with the counterfactual scenario of no fiscal stimulus. Results can be larger for emerging market economies than for advanced countries, since the former devoted a greater share of the stimulus to infrastructure, while the latter made greater resort to tax cuts and transfer increases.

Suggested Citation

Baldacci, Emanuele and Gupta, Sanjeev and Mulas-Granados, Carlos, Getting it Right: How Fiscal Response Can Shorten Crisis Length and Raise Growth (March 25, 2010). Bank of Italy Occasional Paper, Available at SSRN: https://ssrn.com/abstract=1985202 or http://dx.doi.org/10.2139/ssrn.1985202

Emanuele Baldacci (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Sanjeev Gupta

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Carlos Mulas-Granados

Government of the Kingdom of Spain - Economic Bureau of the President ( email )

28071 Madrid
Spain

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