Working Paper: CEPR ID: DP8518
Authors: Pierre-Olivier Gourinchas; Maurice Obstfeld
Abstract: A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century?s first global crisis. A discrete-choice panel analysis using 1973-2010 data suggests that domestic credit expansion and real currency appreciation have been the most robust and significant predictors of financial crises, regardless of whether a country is emerging or advanced. For emerging economies, however, higher foreign exchange reserves predict a sharply reduced probability of a subsequent crisis.
Keywords: banking crisis; credit boom; currency crisis; emerging markets; leverage; sovereign default
JEL Codes: E44; F32; F34; G15; G21; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic credit expansion (E51) | Financial crises (G01) |
| Real currency appreciation (F31) | Financial crises (G01) |
| Higher foreign exchange reserves (F31) | Lower probability of financial crises (F65) |
| Domestic credit expansion (E51) | Leverage (G32) |
| Leverage (G32) | Financial crises (G01) |
| Real currency appreciation (F31) | Leverage (G32) |