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Fiscal policy and the duration of financial crises

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Financial systems across the world have all come under pressure due to the on-going financial crisis. One of the most often asked questions during a collapse is how long and how deep will the decline be as well as what policy initiatives can be employed to shorten the recession. This study estimates a model of the duration of financial crises in an attempt to identify whether fiscal policy can reduce the time to recovery. The results suggest that fiscal shocks, which could provoke an overreaction on the part of markets, tend to lengthen crisis duration. Significant nonlinear effects of government spending are also reported in relation to trade openness and financial openness.

Keywords: C41; E62; G01; duration models; financial crises; financial system; fiscal policy

Document Type: Research Article


Affiliations: Department of Economics,University of the West Indies, Cave Hill CampusBridgetown BB1100, Barbados

Publication date: February 1, 2013

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