Fiscal and Financial Crises

110 Pages Posted: 7 Mar 2016

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Christopher M. Meissner

University of California, Davis

Date Written: March 2016

Abstract

Interconnections between banking crises and fiscal crises have a long history. We document the long-run evolution from classic banking panics towards modern banking crises where financial guarantees are associated with crisis resolution. Recent crises feature a feedback loop between bank guarantees and bank holdings of local sovereign debt thereby linking financial to fiscal crises. Earlier examples include the crises in Chile (early 1980s), Japan (1990), Sweden and Finland (1991), and the Asian crisis (1997). We discuss the evolution in economic theorizing on crises since the 1950s, and then provide an overview of the long-run evolution of connections between different types of crises. Next we explore the empirics of financial crises. We discuss the methodological issue of crisis measurement encompassing the definition, dating, and incidence of financial crises. Leading data sets differ markedly in terms of their historical frequency of crises leading to classification uncertainty. There is a range of estimates of output losses from financial crises in the literature, and these are also dependent upon definitions. We find economically significant output losses from various types of crises using a consistent methodology across time and data sets. Predicting crises also remains a challenge. We survey the Early Warnings Indicators literature finding that a broad range of variables are potential predictors. Credit booms have been emphasized recently, but other factors still matter. Finally, we identify a new policy trilemma. Countries can have two of the following three choices: a large financial sector, fiscal bailouts devoted to financial crises, and discretionary fiscal policy aimed at raising demand during the recessions induced by financial crises.

Suggested Citation

Bordo, Michael D. and Meissner, Christopher M., Fiscal and Financial Crises (March 2016). NBER Working Paper No. w22059. Available at SSRN: https://ssrn.com/abstract=2743058

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher M. Meissner

University of California, Davis ( email )

One Shields Avenue
Davis, CA 95616
United States

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