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Politics and the Determinants of Banking Crises: The Effects of Political Checks and Balances

In: Banking, Financial Integration, and International Crises

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  • Philip Keefer

    (Banco Mundial)

Abstract

A large body of research has provided significant insights into the financial and macroeconomic causes of banking crises. Many of these causes - ranging from lapses in financial regulation to determined efforts to maintain a fixed exchange rate - have in common their origins as policy decisions of political actors. Numerous non-technical criteria, ranging from the identity and interests of political constituencies to political and electoral institutions, condition the incentives of political decision makers to make or correct policy "mistakes". This paper explores the role of one significant political institution, the presence or absence of political checks and balances. Checks and balances influence the independence of regulators, the value and cost of special interest payoffs to policy makers, and individual political incentives to avoid collective policy failures. The evidence suggests that the financial and economic causes of crisis, consistent with these arguments, differ significantly in countries that exhibit few or many political checks and balances.
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Suggested Citation

  • Philip Keefer, 2002. "Politics and the Determinants of Banking Crises: The Effects of Political Checks and Balances," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 3, pages 085-112, Central Bank of Chile.
    • Handle: RePEc:chb:bcchsb:v03c03pp085-112
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    2. Bernd Hayo & Stefan Voigt, 2008. "Inflation, Central Bank Independence, and the Legal System," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(4), pages 751-777, December.
    3. Kwabi, Frank Obenpong & Boateng, Agyenim & Wonu, Chizindu & Kariuki, Charles & Du, Anna, 2023. "Political uncertainty and cross-border equity portfolio allocation decisions: International evidence," International Review of Financial Analysis, Elsevier, vol. 87(C).
    4. Randall G. Holcombe, 2018. "Checks and Balances: Enforcing Constitutional Constraints," Economies, MDPI, vol. 6(4), pages 1-12, October.
    5. Bernardin Akitoby & Thomas Stratmann, 2010. "The value of institutions for financial markets: evidence from emerging markets," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 146(4), pages 781-797, December.
    6. Carney, Richard W. & Liu, Wai-Man (Raymond) & Ngo, Phong T. H., 2012. "Responding to Financial Crisis: The Rise of State Ownership and Implications for Firm Performance," MPRA Paper 43600, University Library of Munich, Germany.

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