Transparency, Liberalization and Financial Crises
AbstractWe investigate the effect of financial liberalization on the probability of a banking crises in economies with poor transparency We construct a model with imperfect information where banks cannot distinguish between aggregate shocks on the one hand, and government’s policy and firms’ quality, on the other. Thus, a sequence of positive shocks or non- transparent policy causes banks to increase their credit above the optimal level given the underlying value of the firms. Once banks discover their large exposure, they are likely to roll-over bad loans rather than declare their losses. This delays the crisis, but increasing its magnitude. Empirical investigation using data on 56 countries from 1977 to 1997 supports the theoretical model. We find that the probability of a crisis is higher in the period following financial liberalization, significantly so in countries with poor transparency.
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Length: 32 pages
Date of creation: 26 Aug 2003
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Financial liberalization; transparency; Financial crisis;
Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
- F30 - International Economics - - International Finance - - - General
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
- G00 - Financial Economics - - General - - - General
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
- H0 - Public Economics - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-08-31 (All new papers)
- NEP-IFN-2003-08-31 (International Finance)
- NEP-PBE-2003-08-31 (Public Economics)
- NEP-PKE-2003-08-31 (Post Keynesian Economics)
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