Debt and Financial Crises
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 accu...
| Main Authors: | , , , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2020
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/560291579701550183/Debt-and-Financial-Crises http://hdl.handle.net/10986/33230 |
| Summary: | 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 cover, 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. |
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