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Financial Market Discipline in Early 20th Century Mexico


  • Elisabeth Huybens

    () (The World Bank)

  • Astrid Luce

    (Department of Economics, University of Essex)

  • Sangeeta Pratap

    () (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))


We test for the presence of market discipline in the banking sector in early 20th century Mexico. Using a panel of financial data from note-issuing banks between 1905 and 1910, we examine whether bank fundamentals influenced the pattern of withdrawals. If we do not control for exit, our estimation suggests that fundamentals were not a significant determinant of depositor behavior. Instead, bank specific fixed effects and systemic risk seem to have been the most important determinants of net changes in deposits. However this period included the banking crisis of 1907 and the subsequent exit of several banks. Our results change when we use a two step estimator to take this into account. Controlling for the selection bias created by exiting banks, we show that fundamentals were indeed an important determinant of bank withdrawals in this period, indicating the existence of market discipline.

Suggested Citation

  • Elisabeth Huybens & Astrid Luce & Sangeeta Pratap, 2001. "Financial Market Discipline in Early 20th Century Mexico," Working Papers 0104, Centro de Investigacion Economica, ITAM.
  • Handle: RePEc:cie:wpaper:0104

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    References listed on IDEAS

    1. Park, Sangkyun & Peristiani, Stavros, 1998. "Market Discipline by Thrift Depositors," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 347-364, August.
    2. Martinez Peria, Maria Soledad & Schmukler, Sergio L., 1999. "Do depositors punish banks for"bad"behavior? : market discipline in Argentina, Chile, and Mexico," Policy Research Working Paper Series 2058, The World Bank.
    3. Hannan, Timothy H & Hanweck, Gerald A, 1988. "Bank Insolvency Risk and the Market for Large Certificates of Deposit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 203-211, May.
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    More about this item


    market discipline; selection bias;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • N2 - Economic History - - Financial Markets and Institutions


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