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The Real Effect of Banking Crises

Author

Listed:
  • Mr. Giovanni Dell'Ariccia
  • Ms. Enrica Detragiache
  • Raghuram Rajan

Abstract

Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. Additional support comes from the fact that sectors that predominantly have small firms, and thus are typically bank-dependent, also perform relatively worse during banking crises. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises have been more severe.

Suggested Citation

  • Mr. Giovanni Dell'Ariccia & Ms. Enrica Detragiache & Raghuram Rajan, 2005. "The Real Effect of Banking Crises," IMF Working Papers 2005/063, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2005/063
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    More about this item

    Keywords

    WP; bank distress; lending channel; growth differential; interaction term; crisis inception;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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