Narrow Results

The main purpose of this paper is to investigate macroeconomic variables that are predictive of banking crisis. We focus on selecting variables that have high predictive power to discriminate between two groups of countries: the sound and the distressed. We consider a sample of 50 emerging market and developing countries during 1990–2005 time period, and apply generalized estimating equations as well as univariate, bivariate and trivariate transvariation analysis to choose the variables that have high predictive and discriminative powers to separate the distressed countries from the sound countries. In order to compare the predictive performance of these selected variables, we calculate the leave one out predictive error rate for the top ranking variables with low transvariation probability using discrimination procedures. Not surprisingly the results show that countries with better macroeconomic and monetary environments and healthier banking institutions are less likely to suffer systemic banking crisis.

The central aim of this paper is to empirically assess the effects of financial liberalization on economic growth in the presence of banking crises. Our empirical investigation is based on a dynamic panel model for a sample of 10 South Mediterranean countries during the period 1980-2005. Results suggest that equity market liberalization positively affects economic growth in these countries, especially in the period of fragility and banking crises. Capital account liberalization, however, has no significant effects. As expected, banking crises exert negative effects on economic growth. When we control for the presence of macroeconomic stability and appropriate openness sequencing, the anticipated effects of capital account liberalization become significant. We conclude that macroeconomic reforms and trade opening are both crucial prerequisites for the success of the capital account liberalization process.