Political Environment and Financial Crises

Abstract

This paper assesses the role of the political environment in the timing of financial crises over a sample of 85 countries during the period 1975-2017. We consider systemic banking, currency, and sovereign debt crises in addition to twin and triple crises. Using a fixed effects logit model, this study shows that banking and currency crises are more likely to occur within one year after elections. There is also evidence that the probability of currency crises increases when right-wing parties are in office. Moreover, time in office of incumbent chief executives reduces the likelihood of any type of financial crises. The incidence of twin and triple crises is lower when majority governments are in office. This study contributes to the literature by calling attention to the importance of some political factors for different types of financial crises.

Keywords: Financial Crisis; Political Environment; Economic Uncertainty

JEL Classification: G01, D72, C25