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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. Eberhardt, Markus, 2018. "(At Least) Four Theories for Sovereign Default," CEPR Discussion Papers 13084, C.E.P.R. Discussion Papers.
    2. repec:wsi:jicepx:v:08:y:2017:i:03:n:s179399331750017x is not listed on IDEAS

    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

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