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Faculty of Economics

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Tambakis, D.

A Markov-Chain Measure of Systemic Banking Crisis Frequency


Abstract: This study nests historical evidence for credit growth-fuelled financial instability in a 2-state non-homogeneous Markov chain with logistic crisis incidence. A long-run frequency measure is defined and calibrated for 17 advanced economies from 1870-2016. It is found that historical (implied) crisis frequencies display a V (J )-pattern over time. A key implication is that policies strengthening capital adequacy contribute more to systemic stability than expanding deposit insurance or curbing credit booms.

Keywords: Credit cycle, Systemic banking crises, Markov chain

JEL Codes: C15 E30 E58 G01

Author links: Demosthenes N.  Tambakis  


Open Access Link:

Published Version of Paper: A Markov Chain Measure of Systemic Banking Crisis Frequency, Tambakis, D., Applied Economics Letters (2020)

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