The Impact of Conflict and Political Instability on Banking Crises in Developing Countries

Ali Compaoré, Montfort Mlachila, Rasmane Ouedraogo () and Sandrine Sourouema

No 2020/041, IMF Working Papers from International Monetary Fund

Abstract: While there is an extensive literature examining the economic impact of conflict and political instability, surprisingly there have been few studies on their impact on the probability of banking crises. This paper therefore investigates whether rising conflict and political instability globally over the past several decades led to increased occurrence of banking crises in developing countries. The paper provides strong evidence that conflicts and political instability are indeed associated with higher probability of systemic banking crises. Unsurprisingly, the duration of a conflict is positively associated with rising probability of a banking crisis. Interestingly, the paper also finds that conflicts and political instability in one country can have negative spillover effects on neighboring countries’ banking systems. The paper provides evidence that the primary channel of transmission is the occurrence of fiscal crises following a conflict or political instability.

Keywords: WP; banking crisis; fiscal crisis; government crisis; state fragility index; conflict; political instability; banking crises; fiscal crises; liquidity shortage; countries matter; banking turmoil; economic growth; banking liquidity shortage; occurrence of a banking crisis; systemic banking crisis; terms of trade; experiencing banking crisis; Commercial banks; Systemic crises; Terms of trade; Logit models; Sub-Saharan Africa; Global; banking crises in year; occurrence of banking crisis; start of a banking crisis (search for similar items in EconPapers)
Pages: 40
Date: 2020-02-28
New Economics Papers: this item is included in nep-dev, nep-fdg and nep-pol
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Citations: View citations in EconPapers (6)

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Working Paper: The Impact of Conflict and Political Instability on Banking Crises in Developing Countries (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2020/041

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