Financial liberalization, exchange‐rate regime, and banking crisis likelihood

Abstract

This paper provides empirical evidence of the impact that financial liberalization plays, within various exchange rate regimes, on the likelihood of systemic banking crisis. Using a sample of 50 banking crisis episodes over the period of 1985–2005, I investigate the impact of financial liberalization and exchange‐rate regime on the likelihood of systemic banking crisis. When interacted with an overall financial liberalization measure, exchange‐rate regime was significant and positive under a flexible regime. Other empirical results show that when interacted with financial liberalization dimensions, exchange‐rate regime variables produced significant results under intermediate and flexible exchange‐rate regimes.