The political determinants of country crises

Abstract

PurposeCountry crises can provoke damages to a country's economic activity and citizens in a way that will always demand a deeper understanding of their determinants. Political issues are commonly mentioned as an important factor boosting these crises. This paper investigates the political factors behind financial crises and recessions.Design/methodology/approachUsing variables from the ICRG rating system, logistic panel regressions are run to determine whether or not the political risk variables explain country crises.FindingsResults disclose the importance of socioeconomic conditions to financial crises and recessions with no influence from the political arena. Against expectations, political instability does not help to explain crises. Political risk ratings also show their importance, demonstrating that the higher is the risk, the higher is the probability of debt and currency crises occurrence.Originality/valueThe findings in this paper contribute to a growing literature of political risk and crises, enhancing the value of political risk assessment and increasing the application of its consequences.