The effects of financial crisis on fiscal positions

Athanasios Tagkalakis

No 145, Working Papers from Bank of Greece

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 (search for similar items in EconPapers)
JEL-codes: E32 E61 E62 H61 H62 H63 (search for similar items in EconPapers)
Pages: 52
Date: 2012-06
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

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Journal Article: The effects of financial crisis on fiscal positions (2013)
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