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Daniel Hardy and Ceyla Pazarbaşioğlu were in the Monetary and Exchange Affairs Department (MAE) when this paper was written. The authors wish to thank William E. Alexander, Timothy Lane, Sunil Sharma, and participants at an MAE seminar for helpful comments and suggestions. Research assistance by Jahanara Begum and Kiran Sastry is greatly appreciated.
Eichengreen and Rose (1998) is another related paper, which concentrates on the influence of worldwide economic trends on the incidence of banking crises in developing countries.
Details of the approach and some additional results are contained in Hardy and Pazarbasioglu (1998).
Estimation was also performed for a dependent variable that identified separately crisis years and the two preceding years (i.e., a dummy variable with the values 0,1,2,3). However, finding any significant explanatory variables singling out the periods two years before crises was difficult.
Eichengreen and Rose (1998) concentrate on banking crises in developing countries, arguing that such crises differ qualitatively from those in industrialized countries. We prefer to single out the newly industrialized countries in Asia and the mostly primary product exporting countries of Africa.
In a few crisis or pre-crisis years, the estimated probability of y0 = 0 is larger than that of each of the other two possibilities, but still less than 50 percent. Hence, the model predicts either y0 = 1 or y0 = 2 in 41 out of 86 instances where this is the case. Conversely, it predicts either y0 = 1 or y0 = 2 in 14 of 167 instances where in fact y0 = 0.
Unfortunately, a measure of interest rate spreads was not available for many countries over most of the sample.
Demirgüc-Kunt and Detragiache find that a number of institutional features of the countries in their sample are significant determinants of banking crises. We instead estimated a fixed effects model using a technique from Chamberlain (1980) to capture all persistent institutional or structural differences between countries. The dependent variable took a value of unity at the onset of an episode of banking system distress, and zero otherwise, and all non-crisis countries had to be excluded from the sample. The fixed effects themselves were found to be always jointly highly significant, indicating that country-specific phenomena are indeed important. However, the estimated parameters on the other variables of interest were not greatly affected by the inclusion of fixed effects, and in some instances their significance increased. Detailed results are available on request.