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Financial Crises After Financial Liberalisation: Exceptional Circumstances or Structural Weakness?

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  • C. E. Weller

Abstract

In this article, I argue that emerging economies are systematically becoming more susceptible to both currency and banking crises after financial liberalisation (FL). Using data for 27 emerging economies from 1973 to 1998, univariate and multivariate analyses indicate that the likelihood of currency crises and banking crises increase after FL. In particular, liberalisation allows more liquidity to enter an emerging economy, which finds its way into productive and speculative projects. What is common to both types of crises is a significant increase in speculative financing, thereby increasing the chance for borrower default. Thus, the outflow of international capital becomes more likely. The chance of a crisis occurring in response to changes in short-term loans is greater after FL than before. Similarly, the chance of a currency crisis occurring following a currency overvaluation is larger after FL than before. In comparison, the likelihood of a banking crisis occurring in response to an overvalued currency remains the same. Finally, the results show that the chance of a currency crisis declines over time, while the chance of a banking crisis increases after FL.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/00220380412331322201
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Development Studies.

Volume (Year): 38 (2001)
Issue (Month): 1 ()
Pages: 98-127

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Handle: RePEc:taf:jdevst:v:38:y:2001:i:1:p:98-127

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Related research

Keywords: emerging economies; financial liberalisation; currency and banking crises; speculative financing; currency overvaluation;

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References

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  1. Carmen M. Reinhart & Sara Calvo, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?," Peterson Institute Press: Chapters, in: Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis, pages 151-171 Peterson Institute for International Economics.
  2. Bernd Schnatz, 2000. "Speculative attacks in emerging markets: The role of macroeconomic fundamentals," Intereconomics: Review of European Economic Policy, Springer, vol. 35(2), pages 81-89, March.
  3. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Is There a Safe Passage to EMU? Evidence on Capital Controls and a Proposal," NBER Chapters, in: The Microstructure of Foreign Exchange Markets, pages 303-332 National Bureau of Economic Research, Inc.
  4. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
  5. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  6. Nadeem Ul Haque & Manmohan S. Kumar & Nelson Mark & Donald J. Mathieson, 1996. "The Economic Content of Indicators of Developing Country Creditworthiness," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 688-724, December.
  7. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  8. International Monetary Fund, 1998. "The Relative Importance of Political and Economic Variables in Creditworthiness Ratings," IMF Working Papers 98/46, International Monetary Fund.
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Citations

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Cited by:
  1. Christian E. Weller & Manita Rao, 2008. "Can Progressive Taxation Contribute to Economic Development?," Working Papers wp176, Political Economy Research Institute, University of Massachusetts at Amherst.
  2. Puspa Amri & Apanard P. Angkinand & Clas Wihlborg, 2011. "International comparisons of bank regulation, liberalization, and banking crises," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(4), pages 322-339, November.
  3. J L Ford & Bagus Santoso & N J Horsewood, 2007. "Asian Currency Crises: Do Fundamentals still Matter? A Markov-Switching Approach to Causes and Timing," Discussion Papers 07-07, Department of Economics, University of Birmingham.
  4. Olaf Hübler & Lukas Menkhoff & Chodechai Suwanaporn, 2008. "Financial Liberalisation in Emerging Markets: How Does Bank Lending Change?," The World Economy, Wiley Blackwell, vol. 31(3), pages 393-415, 03.
  5. Demir, Firat, 2007. "Private Investment and Cash Flow Relationship Revisited: Capital Market Imperfections and Financialization of Real Sectors in Emerging Markets," MPRA Paper 3081, University Library of Munich, Germany.
  6. Mikhail V. Oet & Ryan Eiben & Timothy Bianco & Dieter Gramlich & Stephen J. Ong, 2011. "The financial stress index: identification of systemic risk conditions," Working Paper 1130, Federal Reserve Bank of Cleveland.
  7. DemIr, FIrat, 2009. "Capital Market Imperfections and Financialization of Real Sectors in Emerging Markets: Private Investment and Cash Flow Relationship Revisited," World Development, Elsevier, vol. 37(5), pages 953-964, May.
  8. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
  9. Demir, Firat, 2006. "Volatility of short term capital flows, financial anarchy and private investment in emerging markets," MPRA Paper 3080, University Library of Munich, Germany, revised May 2007.
  10. Jose Miguel Albala-Bertrand, 2006. "The Unlikeliness of an Economic Catastrophe: Localization & Globalization," Working Papers 576, Queen Mary, University of London, School of Economics and Finance.
  11. Ilene GRABEL, 2004. "Trip Wires And Speed Bumps: Managing Financial Risks And Reducing The Potential For Financial Crises In Developing Economies," G-24 Discussion Papers 33, United Nations Conference on Trade and Development.
  12. Ilene Grabel, 2003. "Predicting Financial Crisis in Developing Economies: Astronomy or Astrology?," Eastern Economic Journal, Eastern Economic Association, vol. 29(2), pages 243-258, Spring.
  13. Gerald Epstein & Ilene Grabel, 2007. "Financial Policy," Publications 3, International Policy Centre for Inclusive Growth.
  14. Timothy Bianco & Dieter Gramlich & Mikhail V. Oet & Stephen J. Ong, 2012. "Financial stress index: a lens for supervising the financial system," Working Paper 1237, Federal Reserve Bank of Cleveland.
  15. repec:cuf:journl:y:2014:v:15:i:2:abiad is not listed on IDEAS
  16. Barbara Stallings, 2004. "Financial Liberalization, Crisis, and Rescue: Lessons for China from Latin America and East Asia?," IDB Publications 48078, Inter-American Development Bank.
  17. Haibin Zhu, 2003. "Credit constraints, financial liberalisation and twin crises," BIS Working Papers 124, Bank for International Settlements.
  18. Abdul Abiad, 2003. "Early Warning Systems: A Survey and a Regime-Switching Approach," IMF Working Papers 03/32, International Monetary Fund.

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