The effects of financial crisis on fiscal positions

52 Pages Posted: 28 Jul 2022

Date Written: June 1, 2012

Abstract

The recent financial crisis was characterized by the sizeable fiscal cost of banking sector bail out operations and the significant automatic and discretionary fiscal policy response to shrinking output, which have put increased pressure on public finances in many industrialized countries. This paper tries to evaluate the impact of financial crisis episodes on debt developments. The findings indicate that severe financial crisis episodes increase the stock of debt by 2.7%-4.0% of GDP, on average in the 20 OECD countries examined. Ιn countries with big financial sectors it ranges from 4.2%-5.3% of GDP and in countries with smaller financial sectors it is about 1.4%-1.7% of GDP. The primary balance and the cyclically adjusted fiscal policy stance ease by about 2.6% of GDP and 1.6% of potential GDP, respectively, in the event of a severe financial market crash. Expansionary fiscal interventions are more pronounced in countries with sizable financial sectors. I find significant evidence that a financial market collapse paves the way for a subsequent deterioration in debt ratios.

Keywords: Fiscal policy, Public debt, Financial market, Crisis, Credit

JEL Classification: E61, E62, H61, H62, H63, E32

Suggested Citation

Tagkalakis, Athanasios, The effects of financial crisis on fiscal positions (June 1, 2012). Bank of Greece Working Paper No. 145, Available at SSRN: https://ssrn.com/abstract=4173030 or http://dx.doi.org/10.2139/ssrn.4173030

Athanasios Tagkalakis (Contact Author)

Bank of Greece ( email )

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

University of Patras

Patra
Greece

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