Stories of the Twentieth Century for the Twenty-First

TLDR

Rapid leverage buildup was a key precursor of twentieth‑century financial crises in both emerging and advanced economies. A discrete‑choice panel analysis of 1973–2010 data identified domestic credit expansion and real currency appreciation as the most robust predictors of financial crises, regardless of development status. Emerging economies that avoided leverage booms in the 2000s were most likely to escape the worst effects of the first global crisis of the twenty‑first century, and higher foreign exchange reserves further lowered their subsequent crisis probability. JEL codes: E44, F34, F44, G01, G21, O19.

Abstract

A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century's first global crisis. A discrete-choice panel analysis using 1973–2010 data suggests that domestic credit expansion and real currency appreciation have been the most robust and significant predictors of financial crises, regardless of whether a country is emerging or advanced. For emerging economies, however, higher foreign exchange reserves predict a sharply reduced probability of a subsequent crisis. (JEL E44, F34, F44, G01, G21, O19)