Working Paper: NBER ID: w14587
Authors: Carmen M. Reinhart; Kenneth S. Rogoff
Abstract: The historical frequency of banking crises is quite similar in high- and middle-to-low-income countries, with quantitative and qualitative parallels in both the run-ups and the aftermath. We establish these regularities using a unique dataset spanning from Denmark's financial panic during the Napoleonic War to the ongoing global financial crisis sparked by subprime mortgage defaults in the United States. \n \nBanking crises dramatically weaken fiscal positions in both groups, with government revenues invariably contracting, and fiscal expenditures often expanding sharply. Three years after a financial crisis central government debt increases, on average, by about 86 percent. Thus the fiscal burden of banking crisis extends far beyond the commonly cited cost of the bailouts. Our new dataset includes housing price data for emerging markets; these allow us to show that the real estate price cycles around banking crises are similar in duration and amplitude to those in advanced economies, with the busts averaging four to six years. Corroborating earlier work, we find that systemic banking crises are typically preceded by asset price bubbles, large capital inflows and credit booms, in rich and poor countries alike.
Keywords: Banking crises; Fiscal consequences; Historical analysis
JEL Codes: E6; F3; N0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banking crises (G01) | decline in government revenues (H69) |
| banking crises (G01) | increase in fiscal expenditures (E62) |
| banking crises (G01) | increase in central government debt (H63) |
| asset price bubbles, large capital inflows, and credit booms (F65) | banking crises (G01) |