The Cost of Banking Crises: Does the Policy Framework Matter?

46 Pages Posted: 14 Mar 2019

See all articles by Grégory Levieuge

Grégory Levieuge

Banque de France; University of Orleans - Laboratoire d'économie d'Orléans

Yannick Lucotte

Laboratoire d'Economie d'Orléans, Université d'Orléans; PSB Paris School of Business

Florian Pradines-Jobet

University of Orleans

Multiple version iconThere are 2 versions of this paper

Date Written: March 2019

Abstract

This paper empirically investigates how the stringency of macroeconomic policy frameworks impacts the unconditional cost of banking crises. We consider monetary, fiscal and exchange rate policies. A restrictive policy framework may promote stronger banking stability, by enhancing discipline and credibility, and by giving financial room to policymakers. At the same time though, tying the hands of policymakers may be counterproductive and procyclical, especially if it prevents them from responding properly to financial imbalances and crises. Our analysis considers a sample of 146 countries over the period 1970-2013, and reveals that extremely restrictive policy frameworks are likely to increase the expected cost of banking crises. By contrast, by combining discipline and flexibility, some policy arrangements such as budget balance rules with an easing clause, intermediate exchange rate regimes or an inflation targeting framework may significantly contain the cost of banking crises. As such, we provide evidence on the benefits of “constrained discretion” for the real impact of banking crises.

Keywords: Banking crises, Fiscal rules, Monetary policy, Exchange rate regime, Constrained discretion

JEL Classification: E44, E58, E61, E62, G01

Suggested Citation

Levieuge, Grégory and Lucotte, Yannick and Pradines-Jobet, Florian, The Cost of Banking Crises: Does the Policy Framework Matter? (March 2019). Banque de France Working Paper, Mars 2019, WP #712 , Available at SSRN: https://ssrn.com/abstract=3352380 or http://dx.doi.org/10.2139/ssrn.3352380

Grégory Levieuge (Contact Author)

Banque de France ( email )

Paris
France

University of Orleans - Laboratoire d'économie d'Orléans ( email )

Rue de Blois
Centre
France

Yannick Lucotte

Laboratoire d'Economie d'Orléans, Université d'Orléans ( email )

Rue de Blois
Orléans, 45000
France

PSB Paris School of Business ( email )

59 rue Nationale
Paris, 75013
France

Florian Pradines-Jobet

University of Orleans ( email )

Rue de Blois
B.P. 6739
45067 Orleans Cedex 2, Orleans cedex 2 45067
France

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