Political Economy of Financial Crisis Duration

Abstract

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. Using an extensive database with 125 countries observed over the period 1976-2017 and employing a discrete-time duration model, we find that the electoral cycle, political ideology, majority governments, and institutional quality matter for the understanding of the length of financial crises. This study 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 behavior, while the probability of debt crisis ending decreases monotonically over time.