Macroeconomic adjustment and the history of crises in open economies

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper investigates the impact of the history of crises on macroeconomic performance. We first study the impact of past banking crises on the probability of a future banking crisis. Applying data for 1980-2010 for all countries for which the required information is available, controlling for conventional macro variables and the history of banking crises occurring after 1970, we do not detect a learning process from past banking crises. Countries that have already experienced one banking crisis generally have a higher likelihood of experiencing another crisis; and the depth of the present crisis does not appear to be affected by the previous historical experience with crisis events. Evidence also suggests that, in middle-income countries, higher de jure capital account openness is associated with lower likelihood of a banking crisis, a lower ratio of non-performing loans during the crisis, and higher levels of forgone output in the crisis' aftermath.In contrast, we find that past crisis experience has a significant impact on savings. When facing considerable political risk, the past does seem to matter --countries with more people who were exposed, over their lifetime, to larger disasters will tend to save more. This association, however, does not hold for countries with more stable political systems. We interpret these results as consistent with a differential sectoral adjustment to a crises hypothesis. The private sector, by virtue of its harder budget constraints, adjusts faster, whereas the government adjusts at a slower pace following a crisis. The financial sector may find itself in between the two. The "too big to fail" doctrine associated with large banks provides them with a softer budget constraint, delaying the day of adjustment; for some, delaying bankruptcy. Occasionally, the separation between banks and the public sector is murky, further delaying necessary adjustments of the financial sector.JEL Classification: F36, F41, E2, E4

Political regimes and financial crises

“…All of the control variables' information are collated from IMF's International Financial Statistics, World Bank's World Development Index, Eurostat, Datastream and other national and regional data agencies. In addition, Chinn-Ito de jure index (Aizenman & Noy, 2013) for financial openness is included as a control to capture any possible contagion effect.…”

Financial and Political Institutional Problems as Instigators of Banking Crises

“…Likewise, crisis‐year observations of explanatory variables beyond the first year are excluded because some of the explanatory variables can be affected by the crisis itself. This data treatment has been adopted to avoid the abovementioned problem and biased estimates found in other studies such as Aizenman and Noy (), Demirgüç‐Kunt and Detragiache (, 2005), Klomp (), Joyce (), and Barrell et al (). provides some descriptive statistics of the variables included in the dataset.…”