The effectiveness of fiscal and monetary policy responses to twin crises

Jie Li ()

Applied Economics, 2013, vol. 45, issue 27, 3904-3913

Abstract: We study how effective fiscal and monetary policy responses are during a twin crisis. Using the dataset provided by Laeven and Valencia (2008), we identify 57 episodes of twin crises. Following the methods proposed in Baldacci et al . (2009) and Hutchison et al . (2010), we construct the variables measuring the duration and output cost of a twin crisis. We find that fiscal policy does not seem to be associated with the shortening of a twin crisis. Regarding monetary policy, we find that monetary tightening is associated with the lengthening of a twin crisis duration, consistent with the result in Hutchison et al . (2010) dealing with a sudden stop crisis. In addition, our results show that while a mild monetary expansion is effective in reducing a twin crisis duration, over-expansionary monetary policy loses its effectiveness.

Date: 2013
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DOI: 10.1080/00036846.2012.736943

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