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Faculty of Economics

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Tambakis, D.

A Markov Chain Measure of Systemic Banking Crisis Frequency

Applied Economics Letters

(2020)

Abstract: This study nests historical evidence for credit growth-fuelled financial instability in a two-state nonhomogeneous Markov chain with logistic crisis incidence. A long-run frequency measure is defined and calibrated for 17 advanced economies from 1870 to 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 sustained credit booms.

Keywords: Credit cycle, systemic banking crises, Markov chain

JEL Codes: C15, E30, E58, G01

Author links: Demosthenes N.  Tambakis  

Publisher's Link: https://doi.org/10.1080/13504851.2020.1817300



Cambridge Working Paper in Economics Version of Paper: A Markov-Chain Measure of Systemic Banking Crisis Frequency, Tambakis, D., (2020)

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