This paper explains the puzzle of how a developing economy can shift from a path of reasonable growth before a financial crisis, as in Mexico in 1994, to a sharp decline in economic activity after a crisis occurs. It does so by outlining an asymmetric information framework for analyzing banking and finan- cial crises in developing countries. The asymmetric inforamtion framework shows why the banking sector is so important to the economy, and provides a rationale for bank regulation and supervision. This asymmetric information framework is then used to understand why banking and financial crises occur and why they can have such a devastating effect on the economy countries. The paper concludes by discussing policy implications for developing countries. An important theme is that an appropriate institutional structure is critical to preventing banking and financial crises in developing countries and to reducing their undesirable effects if they should occur.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5600.
Length: Date of creation: Jun 1997 Date of revision: Handle: RePEc:nbr:nberwo:5600
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Find related papers by JEL classification: F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance G2 - Financial Economics - - Financial Institutions and Services
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