Causes, timing and consequences of financial crises

Abstract

In the aftermath of the Great Recession of 2007/08, the challenges facing both academics and policymakers were to provide useful insights into the causes, timing, and consequences of financial crises. Embracing those challenges and using a large cross-country sample over the last four decades, this thesis seeks to answer a set of critical questions related to those challenges: What drives financial crises? What determines the duration of financial crises? And, how do financial crises affect human development? The first empirical chapter assesses the neglected role of the political environment in the timing of financial crises. Using a fixed-effects logit model, banking and currency crises are found to be more likely to occur within one year after elections. There is also evidence that the probability of currency crises increases when right-wing parties are in office. Moreover, time in office of incumbent chief executives reduces the likelihood of any type of financial crisis. The incidence of twin and triple crises is also lower when majority governments are in office. This chapter contributes to the literature by calling the attention to the importance of some political factors for different types of financial crises.Over the last four decades, banking crises around the globe have become longer. This, along with the unprecedented government responses to the Great Recession of 2007/08, has led to a critical question of whether political decisions were somehow to blame for these more prolonged crises. Despite growing concerns, little attention has been given to the political and institutional determinants of financial crisis duration. Employing a Weibull-based parametric duration approach, the second empirical chapter shows that, along with several economic factors that have been found in the literature, the political and institutional environment and the dynamics of duration dependence are critical to understanding the length of different types of financial crises. This analysis also shows that, to better understand the dynamics of the duration of financial crises, it is essential to look at the duration dynamics in each type of financial crisis. Finally, allowing for more flexible duration dependence patterns, we observe that the duration of banking and twin/triple crises presents a non-monotonic cubic behaviour, while the probability of debt crisis ending decreases monotonically over time.Finally, while the existing literature focuses on the effects of financial crises on the economic side, the third empirical chapter examines how financial crises affect the overall human development and its components: health, education and income. Relying on a System-GMM estimator, this study finds that financial crises are more important than some political, institutional and economic factors to explain the human development dynamics. Moreover, all types of financial crises have both short- and long-run adverse effects on human development and its components. Such deteriorations are permanent and increase the burden for future generations, especially for low-income households. Nevertheless, among different dimensions of human development, education is found to be the least affected by financial crises. Furthermore, low- and middle-income countries pay a higher price, in terms of human development, than developed countries as consequences of financial crises.