Banking Crisis, Currency Crisis and Growth

Abstract

This paper examines the effect of banking and currency crises on long-run growth. Our data cover 130 economies from 1800 to 2010, some dating from 1800 with the rest beginning in later years. The data include banking crises, currency crises, output per worker, growth rate of population and regional dummies. We found that both the frequency of banking crises and the frequency of currency crises have a negative and statistically significant effect on growth in the short run and a positive effect on growth, though statistically insignificant, in the longer run. While the frequency of currency crisis has a more negative impact on growth in the short to medium run (10 decades) than does the frequency of banking crisis, the effects of both become insignificantly positive in the longer run. More specifically, we show that the frequency of banking crisis is statistically significantly correlated to growth for the time windows of 1 decade and 2 decades, this negative relationship becoming increasingly more statistically insignificant overall for time windows from 3 decades to 10 decades before finally becoming positive, though statistically insignificant, for the time windows of 13 decades and longer for our sample. The frequency of currency crisis is statistically significantly negatively associated with growth overall for the time windows of 1 decade to 10 decades, before becoming insignificantly positive for time windows of 13 decades and longer for our sample.