Sunday, 23 October 2011: 11:35 AM
In this paper, we consider the long-term effects on economic
output of fiscal deficits and banking crises. Using an unbalanced
panel of thousands of annual observations from 169 countries around
the world, we find very limited evidence that (average) banking crises
have either statistically significant or substantial effects on GDP
growth five years after their onset. The evidence for deficits is
mixed, such that deficit spending seems to have negative impacts on
long-term growth only if performed in a pro-cyclical fashion;
counter-cyclical deficits have either a much smaller negative impact,
or in fact a positive impact, depending on the sub-sample of countries
examined, although generally not statistically significant in either
case. We further find that the effect of deficits on growth varies
substantially by income category and by geographical region. Finally,
we find no consistent evidence for a “catch-up” effect, whereby
countries with lower incomes are postulated to grow at higher rates.
output of fiscal deficits and banking crises. Using an unbalanced
panel of thousands of annual observations from 169 countries around
the world, we find very limited evidence that (average) banking crises
have either statistically significant or substantial effects on GDP
growth five years after their onset. The evidence for deficits is
mixed, such that deficit spending seems to have negative impacts on
long-term growth only if performed in a pro-cyclical fashion;
counter-cyclical deficits have either a much smaller negative impact,
or in fact a positive impact, depending on the sub-sample of countries
examined, although generally not statistically significant in either
case. We further find that the effect of deficits on growth varies
substantially by income category and by geographical region. Finally,
we find no consistent evidence for a “catch-up” effect, whereby
countries with lower incomes are postulated to grow at higher rates.