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Stability periods between financial crises : The role of macroeconomic fundamentals and crises management policies

  • Zorobabel Bicaba

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)

  • Daniel Kapp

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Francesco Molteni

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

The aim of this paper is to identify which factors explain why some countries are more prone to enjoy long durations of stability, while others experience crises in shorter intervals. To this end, we analyze the duration of stability periods between currency, debt, and banking crises from 1980 to 2008. We find that durations of tranquility between currency and debt crises are bimodally distributed, making conventional econometric models unsuitable. Therefore, we introduce an innovative econometric strategy, the Finite Mixture Model. Real and financial variables are found to have high predictive power for the spell of stability between currency crises, while for debt crises, the real interest rate is observed to be the best predictor. The time between the occurrence of systemic financial crises is prolonged through large-scale government interventions and IMF aid programs, while recapitalization turns out to have a negative impact.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00639869.

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Date of creation: Oct 2011
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Handle: RePEc:hal:cesptp:halshs-00639869
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  1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  2. Carmen Reinhart & Vincent Reinhart, 2009. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 9-62 National Bureau of Economic Research, Inc.
  3. Ouarda Merrouche & Erlend Nier, 2010. "What Caused the Global Financial Crisis; Evidenceon the Drivers of Financial Imbalances 1999: 2007," IMF Working Papers 10/265, International Monetary Fund.
  4. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, vol. 98(1), pages 439-57, March.
  5. M M Tudela, 2001. "Explaining Currency Crises: A Duration Model Approach," CEP Discussion Papers dp0487, Centre for Economic Performance, LSE.
  6. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
  7. Reinhart, Carmen M. & Rogoff, Kenneth S., 2010. "Growth in a Time of Debt," Scholarly Articles 11129154, Harvard University Department of Economics.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, April.
  9. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
  10. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2010. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," NBER Working Papers 16567, National Bureau of Economic Research, Inc.
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