Banana Republic Economics, Continued
By Arnold Kling
We find that banking crises almost invariably lead to sharp declines in tax revenues as well significant increases in government spending (a share of which is presumably dissipative). On average, government debt rises by 86 percent during the three years following a banking crisis. These indirect fiscal consequences are thus an order of magnitude larger than the usual bank bailout costs that are the centerpiece of most previous studies. That fact that the magnitudes are comparable in advanced and emerging market economies is also quite remarkable.
They are looking at a multi-country historical sample of banking crises going back two hundred years. Interestingly, they find a housing cycle associated with banking crises. Not surprisingly, they find that sovereign debt crises often follow banking crises. However, defaults are an emerging-market phenomenon–one might say that developed countries no longer default (which may be like saying that house prices never decline).
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