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Saturday, October 19, 2013

Sovereigns versus Banks: Crises, Causes and Consequences'

Here's the conclusion from a Vox EU piece by Òscar Jordà, Moritz Schularick, Alan Taylor:

... Conclusion

The long-run historical record underscores the central role played by private-sector borrowing behavior for the buildup of financial instability.

  • The idea that financial crises typically have their roots in fiscal problems is not supported by history.
  • We find evidence, however, that high levels of public debt can matter for the path of the recovery, confirming the results of Reinhart et al. (2012).

However, this effect is related to recoveries from financial crises rather than typical recessions.

  • While high levels of public debt make little difference in normal times, entering a financial crisis recession with an elevated level of public debt exacerbates the effects of private-sector deleveraging, and typically leads to a prolonged period of sub-par economic performance.

Put differently, the long-run data suggest that without enough fiscal space, a country’s capacity to perform macroeconomic stabilisation and resume growth may be impaired.

    Posted by on Saturday, October 19, 2013 at 10:47 AM in Economics, Financial System | Permalink  Comments (19)


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