Revisiting the Stabilization Role of Public Banks: Public Debt Matters

Author/Editor:

H. Elif Ture

Publication Date:

January 15, 2021

Electronic Access:

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Summary:

This paper revisits the stabilization role of public banks and analyzes whether weak public finances may hinder this role. During the global financial crisis (GFC), public banks were widely used to counter the private credit crunch and prop up the economy. Using cross-country bank-level data for 125 advanced and developing economies for 1999–2018, the paper finds public bank lending to be less procyclical than private bank lending on average, particularly during busts. A key result, however, is that in developing economies with high public debt levels, public bank lending has been more procyclical, particularly outside of the GFC period. This finding suggests high public debt can limit the stabilization role of public banks during domestic busts, likely reflecting higher financing costs public banks face and lower subsidies they receive in economies with tighter budget constraints.

Series:

Working Paper No. 2021/007

Frequency:

regular

English

Publication Date:

January 15, 2021

ISBN/ISSN:

9781513566788/1018-5941

Stock No:

WPIEA2021007

Format:

Paper

Pages:

24

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