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Keywords:

  • G1;
  • E6

Abstract

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. In addition, the debt ratio increased more in countries with a higher initial gross debt-to-GDP ratio, with a higher share of foreign debt, and with a lower quality of institutions. The increase in government debt is also a function of the size of the fiscal stimuli implemented to counter the economic downturns and varies with the type of banking intervention policy used.