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Foreign booms, domestic busts: The global dimension of banking crises

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  • Cesa-Bianchi, Ambrogio
  • Martin, Fernando Eguren
  • Thwaites, Gregory

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.

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  • Cesa-Bianchi, Ambrogio & Martin, Fernando Eguren & Thwaites, Gregory, 2017. "Foreign booms, domestic busts: The global dimension of banking crises," LSE Research Online Documents on Economics 86166, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:86166
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    Cited by:

    1. Zhai, Weiyang, 2020. "Financial structure, capital openness and financial crisis," MPRA Paper 105457, University Library of Munich, Germany.
    2. Kumhof, Michael & Rungcharoenkitkul, Phurichai & Sokol, Andrej, 2020. "How Does International Capital Flow?," CEPR Discussion Papers 15526, C.E.P.R. Discussion Papers.
    3. Eberhardt, Markus, 2018. "(At Least) Four Theories for Sovereign Default," CEPR Discussion Papers 13084, C.E.P.R. Discussion Papers.
    4. Eric Monnet & Damien Puy, 2019. "One Ring to Rule Them All? New Evidence on World Cycles," IMF Working Papers 2019/202, International Monetary Fund.
    5. Stephanie Guichard, 2017. "10 Years after the Global Financial Crisis: What Have We Learnt About International Capital Flows?," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-30, October.
    6. Bank for International Settlements, 2020. "US dollar funding: an international perspective," CGFS Papers, Bank for International Settlements, number 65, Autumn.
    7. Bluwstein, Kristina & Buckmann, Marcus & Joseph, Andreas & Kang, Miao & Kapadia, Sujit & Simsek, Özgür, 2020. "Credit growth, the yield curve and financial crisis prediction: evidence from a machine learning approach," Bank of England working papers 848, Bank of England.

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    More about this item

    Keywords

    Financial Crises; Global Credit Cycle; Banking; Financial Stability; Sentiment.;
    All these keywords.

    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

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