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Foreign Booms, Domestic Busts: The Global Dimension of Banking Crises

Author

Listed:
  • Ambrogio Cesa-Bianchi

    () (Bank of England
    Centre for Macroeconomics (CFM))

  • Fernando Eguren Martin

    () (Bank of England)

  • Gregory Thwaites

    () (Bank of England
    Centre for Macroeconomics (CFM))

Abstract

This paper provides novel empirical evidence showing that foreign financial developments are a powerful predictor of domestic banking crises. Using a new data set for 38 advanced and emerging economies over 1970-2011, we show that credit growth in the rest of the world has a large positive effect on the probability of banking crises taking place at home, even when controlling for domestic credit growth. Our results suggest that this effect is larger for financially open economies, and is consistent with transmission via cross-border capital flows and market sentiment. Direct contagion from foreign crises plays an important role, but does not account for the whole effect.

Suggested Citation

  • Ambrogio Cesa-Bianchi & Fernando Eguren Martin & Gregory Thwaites, 2017. "Foreign Booms, Domestic Busts: The Global Dimension of Banking Crises," Discussion Papers 1708, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1708
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    1. repec:wsi:jicepx:v:08:y:2017:i:03:n:s179399331750017x is not listed on IDEAS
    2. Eberhardt, Markus, 2018. "(At Least) Four Theories for Sovereign Default," CEPR Discussion Papers 13084, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Financial Crises; Global Credit Cycle; Banking; Financial Stability; Sentiment;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises

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