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Financial Crises and the Composition of Public Finances: Evidence from OECD Countries

Markus Leibrecht and Johann Scharler

No icma-dp2017-04, ICMA Centre Discussion Papers in Finance from Henley Business School, Reading University

Abstract: The effects that financial crises exert on public debt-to-GDP ratios have received substantial attention in policy circles and academia alike. We add to this discussion by exploring the impact of financial crises on the composition of public spending and tax revenues. Using the Jorda (2005) local projection approach and data from 23 advanced OECD countries, ranging from 1970 to 2016, we find that expenditures on social security and on interest payments increase relative to total spending, whereas the share of public investment expenditures declines in the aftermath of financial crises. This shift in expenditure composition mainly arises in highly financially developed economies. Our results are also indicative for a financial crisis-induced shift to more long-run economic growth-friendly types of revenues. However, this shift mainly occurs in less financially developed economies.

Keywords: Composition of public budgets; financial crisis; public debt (search for similar items in EconPapers)
JEL-codes: G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-sea
Date: 2017-08
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