Debt and Financial Crises

58 Pages Posted: 12 Feb 2020

See all articles by Wee Chian Koh

Wee Chian Koh

World Bank

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

Peter Stephen Oliver Nagle

World Bank

Franziska Ohnsorge

World Bank

Naotaka Sugawara

World Bank

Multiple version iconThere are 3 versions of this paper

Date Written: February 10, 2020

Abstract

Emerging market and developing economies have experienced recurrent episodes of rapid debt accumulation over the past fifty years. This paper examines the consequences of debt accumulation using a three-pronged approach: an event study of debt accumulation episodes in 100 emerging market and developing economies since 1970; a series of econometric models examining the linkages between debt and the probability of financial crises; and a set of case studies of rapid debt buildup that ended in crises. The paper reports four main results. First, episodes of debt accumulation are common, with more than 500 episodes occurring since 1970. Second, around half of these episodes were associated with financial crises which typically had worse economic outcomes than those without crises—after 8 years output per capita was typically 6-10 percent lower and investment 15-22 percent weaker in crisis episodes. Third, a rapid buildup of debt, whether public or private, increased the likelihood of a financial crisis, as did a larger share of short-term external debt, higher debt service, and lower reserves cover. Fourth, countries that experienced financial crises frequently employed combinations of unsustainable fiscal, monetary and financial sector policies, and often suffered from structural and institutional weaknesses.

Keywords: financial crises, currency crises, debt crises, banking crises, public debt, private debt, external debt

JEL Classification: E32, E61, G01, H12, H61, H63

Suggested Citation

Koh, Wee Chian and Kose, M. Ayhan and Nagle, Peter Stephen Oliver and Ohnsorge, Franziska and Sugawara, Naotaka, Debt and Financial Crises (February 10, 2020). CAMA Working Paper No. 9/2020, Available at SSRN: https://ssrn.com/abstract=3535970 or http://dx.doi.org/10.2139/ssrn.3535970

Wee Chian Koh

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

M. Ayhan Kose (Contact Author)

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Australian National University (ANU)

Canberra, Australian Capital Territory 2601
Australia

Peter Stephen Oliver Nagle

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Franziska Ohnsorge

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Naotaka Sugawara

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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