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Regulation, financial crises, and liberalization traps

Francesco Marchionne (), Beniamino Pisicoli () and Michele Fratianni ()
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Beniamino Pisicoli: University of Bari, Dipartimento di Scienze Economiche e Metodi Matematici

No 143, Mo.Fi.R. Working Papers from Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences

Abstract: To reconcile the mixed results emerging from the empirical literature, we first develop a theoretical model whose main implication is a concave impact of regulation on the probability of a crisis, and then we test this relationship by applying a Probit model of a non-linear specification to annual data from 1999 to 2011 drawn from 132 countries. Our key inference is that the probability of a financial crisis fits an inverted U-shaped curve: it rises as regulation stringency moves from low to medium levels and falls from medium to high levels. Countries located at the intermediate level of regulatory stringency face more financial instability than countries that are either loosely or severely regulated. We identify the latter two groups as falling in "liberalization traps". Institutional quality interacts significantly with the regulatory environment, implying trade-offs between regulatory stringency and institutional quality.

Keywords: crisis; banks; institutions; liberalization; regulation (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-cfn
Date: 2017-11
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Persistent link: https://EconPapers.repec.org/RePEc:anc:wmofir:143

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