Industrial structure and the probability of crisis: Stability is not resilience*

Dongyeol Lee and Hyunjoon Lim

International Journal of Finance & Economics, 2019, vol. 24, issue 1, 212-226

Abstract: We utilize country‐level data to investigate the empirical linkage between an economy's industrial structure and the probability of a banking crisis. This paper shows that a higher share of the service sector tends to significantly increase the risk of a banking crisis. We also explore the potential channels through which the industrial structure may affect an economy's vulnerability to external shocks. The result of the analysis suggests that a higher share of the service sector substantially increases vulnerability to a banking crisis through deterioration in profits and worsening of the current account balance. Our study provides some implications for the recent acceleration of deindustrialization in several emerging and advanced economies: for example, the industrial policy should call for a more cautious approach to reduce the potential risks of deindustrialization (increase in crisis vulnerability).

Date: 2019
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