Financial Market Discipline in Early 20th Century Mexico

Elisabeth Huybens (), Astrid Luce and Sangeeta Pratap
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Elisabeth Huybens: The World Bank
Astrid Luce: Department of Economics, University of Essex

No 104, Working Papers from Centro de Investigacion Economica, ITAM

Abstract: We test for the presence of market discipline in the banking sector in early 20th century Mexico. Using a panel of financial data from note-issuing banks between 1905 and 1910, we examine whether bank fundamentals influenced the pattern of withdrawals. If we do not control for exit, our estimation suggests that fundamentals were not a significant determinant of depositor behavior. Instead, bank specific fixed effects and systemic risk seem to have been the most important determinants of net changes in deposits. However this period included the banking crisis of 1907 and the subsequent exit of several banks. Our results change when we use a two step estimator to take this into account. Controlling for the selection bias created by exiting banks, we show that fundamentals were indeed an important determinant of bank withdrawals in this period, indicating the existence of market discipline.

Keywords: market discipline; selection bias (search for similar items in EconPapers)
JEL-codes: G2 N2 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2001-01
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http://ftp.itam.mx/pub/academico/inves/pratap/01-04.pdf First version, 2001 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:cie:wpaper:0104

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