The effects of financial crisis on fiscal positions |
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| Institution: | 1. Department of Business Administration, University of Zurich, Plattenstrasse 14, 8032 Zurich, Switzerland;2. School of Business, Lucerne University of Applied Sciences and Arts, Zentralstrasse 9, 6002 Lucerne, Switzerland;1. LEO, Université François Rabelais, Tours. 50, Avenue Jean Portalis BP 37206, Tours Cedex 03 France;2. Università di Salerno, Dipartimento di Scienze Economiche e Statistiche and CSEF, Via Giovanni Paolo II, 132, 84084 Fisciano SA, Italy;1. Kent Business School, The University of Kent, Canterbury, Kent CT2 7PE, UK\n;2. Department of Economics, University of Thessaly, Korai 43, 38333 Volos, Greece\n;1. University of Siegen Hölderinstr. 3, 57076 Siegen, Germany;2. Research Department, Bank of Israel, POB 780, Jerusalem 91007, Israel;3. ZEW Mannheim, L 7, 1, 68161 Mannheim, Germany;4. Division of Public Administration and Policy, School of Political Science, University of Haifa, 199 Aba Koushy Blvd., Haifa, Israel |
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| 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. |
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