Fiscal Sustainability in the Presence of Systemic Banks: The Case of EU Countries
35 Pages Posted: 1 Nov 2012
Date Written: October 30, 2012
We provide a first attempt to include off-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps à la Blanchard (1990) and Blanchard et al. (1990). We then introduce two alternative measures of implicit off-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies of microeconomic data at the bank level. The second one relies on econometric estimations of the probability and the cost of a systemic banking crisis, based on historical data. The former approach provides an upper evaluation of the fiscal cost of systemic banking crises, whereas the latter one provides a lower one. Hence we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk.
Keywords: fiscal sustainability, tax gap, systemic banking risk, off-balance sheet liabilities
JEL Classification: H120, H630, H810
Suggested Citation: Suggested Citation