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Stability periods between financial crises : The role of macroeconomic fundamentals and crises management policies

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  • Zorobabel Bicaba

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)

  • Daniel Kapp

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Francesco Molteni

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

Abstract

The aim of this paper is to identify which factors explain why some countries are more prone to enjoy long durations of stability, while others experience crises in shorter intervals. To this end, we analyze the duration of stability periods between currency, debt, and banking crises from 1980 to 2008. We find that durations of tranquility between currency and debt crises are bimodally distributed, making conventional econometric models unsuitable. Therefore, we introduce an innovative econometric strategy, the Finite Mixture Model. Real and financial variables are found to have high predictive power for the spell of stability between currency crises, while for debt crises, the real interest rate is observed to be the best predictor. The time between the occurrence of systemic financial crises is prolonged through large-scale government interventions and IMF aid programs, while recapitalization turns out to have a negative impact.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00639869.

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Date of creation: Oct 2011
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Handle: RePEc:hal:cesptp:halshs-00639869

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Keywords: Financial crises; Finite mixture model; duration; bimodality.;

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  1. Ouarda Merrouche & Erlend Nier, 2010. "What Caused the Global Financial Crisis," IMF Working Papers 10/265, International Monetary Fund.
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  10. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "From Financial Crash to Debt Crisis," NBER Working Papers 15795, National Bureau of Economic Research, Inc.
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  12. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2010. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," NBER Working Papers 16567, National Bureau of Economic Research, Inc.
  13. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-78, May.
  14. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  15. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
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  17. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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Cited by:
  1. Daniel Kapp & Marco Vega, 2012. "Real Output Costs of Financial Crises: a Loss Distribution Approach," Documentos de Trabajo 2012-332, Departamento de Economía - Pontificia Universidad Católica del Perú.
  2. Kapp, Daniel & Vega, Marco, 2012. "The Real Output Costs of Financial Crisis: A Loss Distribution Approach," Working Papers 2012-013, Banco Central de Reserva del Perú.
  3. Kapp, Daniel & Vega, Marco, 2012. "Real output costs of financial crises: a loss distribution approach," MPRA Paper 35706, University Library of Munich, Germany.

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