Financial Crises, Macroeconomic Shocks, and the Government Balance Sheet : A Panel Analysis

Government financial assets are increasingly recognized as playing an important role inassessing fiscal sustainability. However, very little research has been done on the dynamics ofgovernment financial assets compared to liabilities. In this paper, we investigate the impact ofrecent financial crises and macroeconomic shocks on government balance sheets, decomposingthe separate effects on financial assets and liabilities. Using quarterly Government FinanceStatistics (GFS) data, we analyze a panel of 27 countries over the period 1999Q1-2017Q1through fixed effects and panel VAR techniques. Financial crises are shown to deteriorate thenet financial worth of governments, but no significant impact is found on assets suggesting thatthey are not being used as fiscal buffers in bad times. On the contrary, countries that sufferedboth financial and banking crises experienced an 'artificial' increase of their asset positionthrough bank bailouts. Macroeconomic shock analyses reveal that government balance sheetitems are countercyclical, but important asymmetries are found in their dynamics