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Democracy and Financial Crisis

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  • Lipscy, Phillip Y.

Abstract

Existing scholarship attributes various political and economic advantages to democratic governance. These advantages may make more democratic countries prone to financial crises. Democracy is characterized by constraints on executive authority, accountability through free and fair elections, protections for civil liberties, and large winning coalitions. These characteristics bring important benefits, but they can also have unintended consequences that increase the likelihood of financial instability and crises. Using data covering the past two centuries, I demonstrate a strong relationship between democracy and financial crisis onset: on average, democracies are about twice as likely to experience a crisis as autocracies. This is an empirical regularity that is robust across a wide range of model specifications and time periods.

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  • Lipscy, Phillip Y., 2018. "Democracy and Financial Crisis," International Organization, Cambridge University Press, vol. 72(4), pages 937-968, October.
    • Handle: RePEc:cup:intorg:v:72:y:2018:i:04:p:937-968_00
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    Cited by:

    1. Beni Kouevi-Gath & Pierre-Guillaume Méon & Laurent Weill, 2021. "Do banking crises improve democracy?," Public Choice, Springer, vol. 186(3), pages 413-446, March.
    2. Joon Hyeok Lee, 2024. "Consecutive decentralization: The effect of central bank independence on capital account liberalization," Economics and Politics, Wiley Blackwell, vol. 36(2), pages 809-831, July.
    3. Lavezzolo, Sebastián, 2020. "Political regimes and bank interest margins," Economic Systems, Elsevier, vol. 44(2).
    4. Serikbayeva, Balzhan & Abdulla, Kanat & Oskenbayev, Yessengali, 2020. "State capacity in responding to COVID-19," MPRA Paper 101511, University Library of Munich, Germany.
    5. Etienne Lepers, 2022. "Manipulating Credit: Government Popularity as Driver of Credit Cycles," Working Papers REM 2022/0239, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    6. Kin-Man Wan & Ka-U Ng & Thung-Hong Lin, 2020. "The Political Economy of Football: Democracy, Income Inequality, and Men’s National Football Performance," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 151(3), pages 981-1013, October.
    7. Mohamed Sami Ben Ali & Sami Ben Mim, 2023. "Democracy and Banking Stability: Is the Relationship U-Shaped?," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(4), pages 4426-4448, December.
    8. Daniel Hansen, 2023. "The democratic (dis)advantage: The conditional impact of democracy on credit risk and sovereign default," Economics and Politics, Wiley Blackwell, vol. 35(1), pages 356-410, March.
    9. Betz, Timm & Pond, Amy, 2023. "Democratic institutions and regulatory privileges for government debt," European Journal of Political Economy, Elsevier, vol. 79(C).

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