Financial crises after financial liberalization: Exceptional circumstances or structural weakness?
Recent studies have conjectured that there may be a link between financial liberalization and financial instability in emerging economies. Most of these studies, however, do not investigate whether emerging economies are becoming structurally more vulnerable to currency and banking crises. In this paper, we argue that emerging economies are systematically becoming more susceptible to both currency and banking crises after FL. Using data for 27 emerging economies from 1973 to the present, univariate and multivariate analyses indicate that the likelihood of currency crises and banking crises increase after FL. In particular, liberalization allows more liquidity to enter an emerging economy, which finds its way into productive and speculative projects. What is common to both types of crises is a significant increase in speculative financing, thereby increasing the chance for borrower default. Thus, the outflow of international capital becomes more likely, and we find that the chance of either type of crisis grows faster in response to changes in short-term loans after FL than before. Similarly, the reactions to overvalued currencies are at least similar in terms of increasing probabilities of crises in the case of banking crises, or greater in the case of currency crises after FL as compared to before FL. Further, our results show that after FL the chance of a currency crisis declines over time, while the chance of a banking crisis increases.
|Date of creation:||1999|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.zei.de/index_e.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Frankel, Jeffrey A. & Rose, Andrew K., 1996.
"Currency crashes in emerging markets: An empirical treatment,"
Journal of International Economics,
Elsevier, vol. 41(3-4), pages 351-366, November.
- Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
- Bernd Schnatz, 2000. "Speculative attacks in emerging markets: The role of macroeconomic fundamentals," Intereconomics: Review of European Economic Policy, Springer, vol. 35(2), pages 81-89, March.
- Barry Eichengreen, Andrew K. Rose, and Charles Wyplosz., 1995.
"Is There a Safe Passage to EMU? Evidence on Capital Controls and a Proposal,"
Center for International and Development Economics Research (CIDER) Working Papers
C95-047, University of California at Berkeley.
- Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Is There a Safe Passage to EMU? Evidence on Capital Controls and a Proposal," NBER Chapters, in: The Microstructure of Foreign Exchange Markets, pages 303-332 National Bureau of Economic Research, Inc.
- Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1994. "Is There a Safe Passage to EMU? Evidence on Capital Controls and a Proposal," CEPR Discussion Papers 1061, C.E.P.R. Discussion Papers.
- International Monetary Fund, 1996.
"The Economic Content of Indicators of Developing Country Creditworthiness,"
IMF Working Papers
96/9, International Monetary Fund.
- Nadeem Ul Haque & Manmohan S. Kumar & Nelson Mark & Donald J. Mathieson, 1996. "The Economic Content of Indicators of Developing Country Creditworthiness," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 688-724, December.
- Graciela Laura Kaminsky, 1997.
"Leading Indicators of Currency Crises,"
IMF Working Papers
97/79, International Monetary Fund.
- Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
- Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996.
"The twin crises: the causes of banking and balance-of-payments problems,"
International Finance Discussion Papers
544, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
- Carmen M. Reinhart & Sara Calvo, 1996.
"Capital Flows to Latin America: Is There Evidence of Contagion Effects?,"
Peterson Institute Press: Chapters,
in: Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis, pages 151-171
Peterson Institute for International Economics.
- Calvo, Sara & Reinhart, Carmen, 1996. "Capital flows to Latin America : Is there evidence of contagion effects?," Policy Research Working Paper Series 1619, The World Bank.
- Reinhart, Carmen & Calvo, Sara, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?”," MPRA Paper 7124, University Library of Munich, Germany.
- International Monetary Fund, 1998. "The Relative Importance of Political and Economic Variables in Creditworthiness Ratings," IMF Working Papers 98/46, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:zbw:zeiwps:b151999. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.