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Banking crises and exchange rate regimes - Is there a link?

  • Domac, Ilker
  • Martinez-Peria, Maria Soledad

The authors investigate the links between banking crises, and exchange rate regimes, using a comprehensive data set that includes developed, and developing countries over the last two decades. In particular, they examine whether the choice of exchange rate regime affects the likelihood, cost, and duration of banking crises. Empirical results indicate that adopting a fixed exchange rate, diminishes the likelihood of a banking crisis in developing countries. But once a banking crisis occurs, its real costs - in terms of forgone output growth - are higher for countries with more stringent exchange rate requirements. The duration of crises seems not to be affected by exchange rate policy. Instead, it is influenced mainly by the size of the credit boom before the crisis.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2489.

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Date of creation: 30 Nov 2000
Date of revision:
Handle: RePEc:wbk:wbrwps:2489
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  1. Reuven Glick & Michael M. Hutchison, 1999. "Banking and currency crises; how common are twins?," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
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  13. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
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  18. repec:oup:qjecon:v:117:y:2002:i:2:p:379-408 is not listed on IDEAS
  19. Marianne Baxter & Alan C. Stockman, 1988. "Business Cycles and the Exchange Rate System: Some International Evidence," NBER Working Papers 2689, National Bureau of Economic Research, Inc.
  20. Rizzo, Jean-Marc, 1998. "The economic determinants of the choice of an exchange rate regime: a probit analysis," Economics Letters, Elsevier, vol. 59(3), pages 283-287, June.
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