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How Effective is Fiscal Policy Response in Systemic Banking Crises?
Author:
Mr. Sanjeev Gupta
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Mr. Carlos Mulas-Granados null

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Mr. Emanuele Baldacci
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Series:
IMF Working Papers
Volume/Issue:
Volume 2009: Issue 160
Language:
English
Publication Date:
01 Jul 2009
DOI:
https://doi.org/10.5089/9781451873078.001
ISBN:
9781451873078
ISSN:
1018-5941
Pages:
38
Keywords:
WP; banking crisis; fiscal policy response; crisis length; expansionary fiscal policy
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper studies the effects of fiscal policy response in 118 episodes of systemic banking crisis in advanced and emerging market countries during 1980-2008. It finds that timely countercyclical fiscal measures contribute to shortening the length of crisis episodes by stimulating aggregate demand. Fiscal expansions that rely mostly on measures to support government consumption are more effective in shortening the crisis duration than those based on public investment or income tax cuts. But these results do not hold for countries with limited fiscal space where fiscal expansions are prevented by funding constraints. The composition of countercyclical fiscal responses matters as well for output recovery after the crisis, with public investment yielding the strongest impact on growth. These results suggest a potential trade-off between short-run aggregate demand support and medium-term productivity growth objectives in fiscal stimulus packages adopted in distress times.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund