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

Grégory Levieuge, Yannick Lucotte () and Florian Pradines-Jobet

Working papers from Banque de France

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. (search for similar items in EconPapers)
JEL-codes: E44 E58 E61 E62 G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac and nep-mon
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:712

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