Abstract
This paper investigates whether banking crises are associated with declines in bilateral exports. We first develop a simple open economy model in which banking crises translate into negative liquidity shocks, leading to collapses in exports through supply-side and demand-side shocks. We then estimate a gravity model using a sample of 75 countries over the 1988–2010 period. The results suggest that crisis-hit countries experience lower levels of bilateral exports. Exports of manufactured goods are disproportionately hurt by crises, and this negative effect is stronger in industries relying more on external finance. These findings are robust to correcting for potential endogeneity, to controlling for outliers, and to using alternative estimation methods.
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