Revisiting the Stabilization Role of Public Banks: Public Debt Matters

Volume/Issue: Volume 2021 Issue 007

Publication date: January 2021

ISBN: 9781513566788

$18.00

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Topics covered in this book

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Banks and Banking , Economics- Macroeconomics , Money and Monetary Policy , Public Finance , Public banks , countercyclical lending , economic stabilization , high public debt , WP , public bank , bank lending , development bank , bank borrowing costs , doom loop

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Summary

This paper revisits the stabilization role of public banks and analyzes whether weak public finances may hinder this role. During the global financial crisis (GFC), public banks were widely used to counter the private credit crunch and prop up the economy. Using cross-country bank-level data for 125 advanced and developing economies for 1999–2018, the paper finds public bank lending to be less procyclical than private bank lending on average, particularly during busts. A key result, however, is that in developing economies with high public debt levels, public bank lending has been more procyclical, particularly outside of the GFC period. This finding suggests high public debt can limit the stabilization role of public banks during domestic busts, likely reflecting higher financing costs public banks face and lower subsidies they receive in economies with tighter budget constraints.