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A Markov-Chain Measure of Systemic Banking Crisis Frequency

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Abstract

This study nests historical evidence for credit growth-fuelled financial instability in a 2-state non-homogeneous Markov chain with logistic crisis incidence. A long-run frequency measure is defined and calibrated for 17 advanced economies from 1870-2016. It is found that historical (implied) crisis frequencies display a V (J )-pattern over time. A key implication is that policies strengthening capital adequacy contribute more to systemic stability than expanding deposit insurance or curbing credit booms.

Suggested Citation

  • Tambakis, D., 2020. "A Markov-Chain Measure of Systemic Banking Crisis Frequency," Cambridge Working Papers in Economics 2083, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:2083
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit cycle; Systemic banking crises; Markov chain;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises

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