We are very grateful to Béatrice Saes–Escorbiac and Aurélie Touchais for excellent research assistance. The views expressed in this paper do not necessarily re‡ect those of the Banque de France. We thank participants at the conference “The Macroeconomics of Housing Markets ” (held in Paris on 3-4 December 2009) and at the ECB expert meeting on “Tools for detecting asset-price imbalances, the role of money and credit and the impact on consumer-price in‡ation ” (held at Frankfurt on 15 December 2009). In particular, we thank our discussants Timo Wollmershäuser, Giovanni Ferri and Nicola Doyle for helpful comments. We are also grateful to the BIS for having kindly provided us with asset-price data.

The costs of wars have been the main driver of public debt in the Western World during the modern era. The late twentieth century stands out as a period that saw a pronounced increase of government debt to GDP ratios in peacetime. This paper assesses the role that financial crises have played in shaping the public debt trajectory in the twentieth century. Focusing on the experiences of 14 industrial economies, I show that financial crises have long and lasting effects on public finances. I provide evidence that the costs of financial crises have increased strongly in the second half of the twentieth century and that the costs of financial crises grow with the size of the financial sector. In many countries, the rising costs incurred from stabilizing the economy after financial crises were an important cause of the peacetime surge of public debt ratios in the late twentieth century. In today's highly financialized economies, financial crises have become a key risk for public finances.

interest rate setting: What lessons have we learned

publications feature a motif taken from the €50 banknote. NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily refl ect those of the ECB. Acknowledgements The authors are grateful to Thierry Bracke, Marc Flandreau, Kristin Forbes, Norbert Gaillard, Christopher Meissner, Angela Redish and Roland Straub for helpful discussions. The views expressed in this paper are those of the authors and do not necessarily reflect those of the ECB or the Eurosystem.

NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. Macroprudential Research Network This paper presents research conducted within the Macroprudential Research Network (MaRs). The network is composed of economists from the European System of Central Banks (ESCB), i.e. the 27 national central banks of the European Union (EU) and the European Central Bank. The objective of MaRs is to develop core conceptual frameworks, models and/or tools supporting macro-prudential supervision in the EU. The research is carried out in three work streams: 1) Macro-financial models linking financial stability and the performance of the economy; 2) Early warning systems and systemic risk indicators; 3) Assessing contagion risks.

When did the dollar overtake sterling as the leading

Workshop (Washington DC), the Third Financial History Workshop (Tilburg), the XX Finance Forum