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Banking crises and exchange rate regimes - Is there a link?

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  • Domac, Ilker
  • Martinez-Peria, Maria Soledad

Abstract

The authors investigate the links between banking crises, and exchange rate regimes, using a comprehensive data set that includes developed, and developing countries over the last two decades. In particular, they examine whether the choice of exchange rate regime affects the likelihood, cost, and duration of banking crises. Empirical results indicate that adopting a fixed exchange rate, diminishes the likelihood of a banking crisis in developing countries. But once a banking crisis occurs, its real costs - in terms of forgone output growth - are higher for countries with more stringent exchange rate requirements. The duration of crises seems not to be affected by exchange rate policy. Instead, it is influenced mainly by the size of the credit boom before the crisis.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2489.

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Date of creation: 30 Nov 2000
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Handle: RePEc:wbk:wbrwps:2489

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Keywords: Economic Theory&Research; Macroeconomic Management; Economic Stabilization; Financial Economics; Fiscal&Monetary Policy;

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  1. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
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  3. Honohan, Patrick & Klingebiel, Daniela, 2000. "Controlling the fiscal costs of banking crises," Policy Research Working Paper Series 2441, The World Bank.
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  8. Eichengreen, Barry, 2002. "When to Dollarize," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 1-24, February.
  9. Reuven Glick & Michael Hutchison, 1999. "Banking and currency crises; how common are twins?," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  10. Kaminsky, Graciela L & Reinhart, Carmen M, 1998. "Financial Crises in Asia and Latin America: Then and Now," American Economic Review, American Economic Association, vol. 88(2), pages 444-48, May.
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  13. Reinhart, Carmen & Calvo, Guillermo, 2001. "Fixing for your life," MPRA Paper 13873, University Library of Munich, Germany.
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  22. repec:fth:inadeb:318 is not listed on IDEAS
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  27. Rizzo, Jean-Marc, 1998. "The economic determinants of the choice of an exchange rate regime: a probit analysis," Economics Letters, Elsevier, vol. 59(3), pages 283-287, June.
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