Date Added: Jan 2010
A common legacy of banking crises is a large increase in government debt, as fiscal resources are used to shore up the banking system. Do crisis response strategies that commit more fiscal resources lower the economic costs of crises? Based on evidence from a sample of 40 banking crises the author finds that the answer is negative. In fact, policies that are riskier for the government budget are associated with worse, not better, post-crisis performance. The author also shows that parliamentary political systems are more prone to adopt bank rescue measures that are costly for the government budget.