OECD Economics Department Working Papers

ISSN :: 1815-1973 (online)
DOI :: 10.1787/18151973

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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The Consequences of Banking Crises for Public Debt

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Authors:

Davide Furceri¹, Aleksandra Zdzienicka^{2, 3}

Author Affiliations

1: OECD, France

2: University of Lyon, France

3: CEPII, Paris, France

Publication Date

25 Aug 2010

Bibliographic information

No.:: 801

Pages

DOI

10.1787/5km7v02j85zp-en

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The aim of this paper is to assess the consequences of banking crises for public debt. Using an unbalanced panel of 154 countries from 1980 to 2006, the paper shows that banking crises are associated with a significant and long-lasting increase in government debt. The effect is a function of the severity of the crisis. In particular, for severe crises, comparable to the most recent one in terms of output losses, banking crises are followed by a medium-term increase of about 37 percentage points in the government gross debt-to-GDP ratio. Measuring the increase in debt in this manner seems more appropriate than some of the measures used in the literature that have provided off-quoted and very large numbers for the run-up in debt. In addition, the debt ratio increased more in countries with a higher initial gross debt-to-GDP ratio and with a higher initial foreign debt-to-GDP ratio.

Keywords:: financial crisis, public debt, banking crisis

JEL Classification:

E6: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
G1: Financial Economics / General Financial Markets