Regulation, Financial Crises, and Liberalization Traps

46 Pages Posted: 23 Jul 2019

See all articles by Francesco Marchionne

Francesco Marchionne

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Università Politecnica delle Marche - Department of Economics

Beniamino Pisicoli

University of Rome Tor Vergata - Department of Economics and Finance

Michele U. Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Universita' Politecnica delle Marche

Date Written: 2019

Abstract

To reconcile the mixed empirical results, we develop a theoretical model whose main implication is a concave impact of regulation on the probability of a crisis. 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. 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 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.

Keywords: crisis, banks, institutions, liberalization, regulation

JEL Classification: G010, G210, G280

Suggested Citation

Marchionne, Francesco and Pisicoli, Beniamino and Fratianni, Michele, Regulation, Financial Crises, and Liberalization Traps (2019). CESifo Working Paper No. 7724. Available at SSRN: https://ssrn.com/abstract=3421151

Francesco Marchionne (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

1309 East Tenth Street
Bloomington, IN 47405-1701
United States
01 812 855-3756 (Phone)

HOME PAGE: http://kelley.iu.edu/BEPP/Faculty/page14113.cfm?ID=47081

Università Politecnica delle Marche - Department of Economics ( email )

Piazzale Martelli, 8
Ancona, 60121
Italy
+39 071 2207120 (Phone)

Beniamino Pisicoli

University of Rome Tor Vergata - Department of Economics and Finance ( email )

Via columbia 2
Rome, Rome 00123
Italy

Michele Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-3360 (Phone)
812-855-3354 (Fax)

Universita' Politecnica delle Marche ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
39-071-2207120 (Phone)

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