Does external shock trigger systemic banking distress?

Xiaojun Li and Yan Fang

Journal of Economic Policy Reform, 2015, vol. 18, issue 1, 51-68

Abstract: Before 2007, many studies claimed that wide-scale banking distress in various countries was preceded and could be predicted by deteriorating macroeconomic indicators such as falling GDP growth rate. However, these researches were mostly based on “event studies” which identified crises too late. By using banking sector asset price data, the paper finds that economies still thrive in the “pre-crisis” period in terms of increasing GDP growth. The slowdown of economy in terms of a fall in GDP growth is generally associated with the post-crisis period coinciding with the bubble burst process. Thus, this result supports the policy view that it is not useful to postpone macroeconomic stability to conceal banking sector weakness.

Date: 2015
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DOI: 10.1080/17487870.2014.973879

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