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Revisiting the Stabilization Role of Public Banks: Public Debt Matters

H. Elif Ture

No 2021/007, IMF Working Papers from International Monetary Fund

Abstract: This paper revisits the stabilization role of public banks and analyzes whether weak public finances may hinder this role. During the global financial crisis (GFC), public banks were widely used to counter the private credit crunch and prop up the economy. Using cross-country bank-level data for 125 advanced and developing economies for 1999–2018, the paper finds public bank lending to be less procyclical than private bank lending on average, particularly during busts. A key result, however, is that in developing economies with high public debt levels, public bank lending has been more procyclical, particularly outside of the GFC period. This finding suggests high public debt can limit the stabilization role of public banks during domestic busts, likely reflecting higher financing costs public banks face and lower subsidies they receive in economies with tighter budget constraints.

Keywords: Public banks; countercyclical lending; economic stabilization; high public debt; WP; public bank; bank lending; development bank; bank borrowing costs; doom loop (search for similar items in EconPapers)
Pages: 24
Date: 2021-01-15
New Economics Papers: this item is included in nep-fdg and nep-isf
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Handle: RePEc:imf:imfwpa:2021/007