How Effective is Fiscal Policy Response in Systemic Banking Crises?
IMF Working Papers, July 1, 2009
Source details
- Canonical URL
- How Effective is Fiscal Policy Response in Systemic Banking Crises?
Other formats
Bibliographic details
- Authors: Sanjeev Gupta, Carlos Mulas-Granados, Emanuele Baldacci
- Published: July 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451873078.001
Study scope and metadata
- Authors: Sanjeev Gupta, Carlos Mulas-Granados, Emanuele Baldacci
- Date: July 1, 2009
- Sample: 118 episodes of systemic banking crisis in advanced and emerging market countries during 1980-2008
- Publication: IMF Working Papers, Working Paper No. 2009/160, Issue 160, Volume 2009, Pages: 38
- DOI: https://doi.org/10.5089/9781451873078.001
- Stock No: WPIEA2009160
- ISBN: 9781451873078
- ISSN: 1018-5941
Core findings
- Timeliness and countercyclicality
- Timely countercyclical fiscal measures contribute to shortening the length of crisis episodes by stimulating aggregate demand.
- Composition of fiscal expansions and crisis duration
- 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.
- Fiscal space and funding constraints
- The effectiveness of fiscal expansions in shortening crisis duration does not hold for countries with limited fiscal space where fiscal expansions are prevented by funding constraints.
- Composition and output recovery
- The composition of countercyclical fiscal responses matters for output recovery after the crisis, with public investment yielding the strongest impact on growth.
- Trade-off identified
- The 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.
Policy implications and considerations
- Prioritize timeliness: Implement countercyclical fiscal measures promptly during systemic banking crises to help shorten crisis duration via aggregate demand stimulus.
- Consider composition trade-offs:
- Government consumption-focused fiscal expansions: more effective at shortening crisis duration in settings with available fiscal space.
- Public investment: strongest impact on growth during output recovery, supporting medium-term productivity.
- Income tax cuts: less effective at shortening crisis duration compared with measures supporting government consumption.
- Fiscal space assessment:
- Evaluate funding constraints and fiscal space before deploying expansionary fiscal policy; limited fiscal space can prevent the effectiveness of fiscal expansions.
- Balance objectives:
- Design stimulus packages mindful of the potential trade-off between immediate demand stabilization and medium-term productivity-enhancing public investment.
This summary is based on the IMF Working Paper "How Effective is Fiscal Policy Response in Systemic Banking Crises?" by Sanjeev Gupta, Carlos Mulas-Granados, and Emanuele Baldacci (July 1, 2009).
Content in this bundle
- 1. Fiscal Aggregates