de Travail du Centre d ’ Economie de la Sorbonne Stability periods between financial crises : The role of macroeconomic fundamentals and crises management policies

The aim of this paper is to identify which factors explain why some countries are more prone to enjoy long durations of stability, while others experience crises in shorter intervals. To this end, we analyze the duration of stability periods between currency, debt, and banking crises from 1980 to 2008. We find that durations of tranquility between currency and debt crises are bimodally distributed, making conventional econometric models unsuitable. Therefore, we introduce an innovative econometric strategy, the Finite Mixture Model. Real and financial variables are found to have high predictive power for the spell of stability between currency crises, while for debt crises, the real interest rate is observed to be the best predictor. The time between the occurrence of systemic financial crises is prolonged through large-scale government interventions and IMF aid programs, while recapitalization turns out to have a negative impact. Code JEL. C14 C16 C41 G01 G18 H12 keywords:Financial crises, Finite mixture model, duration, bimodality. ∗We thank Professor Fabrizio Coricelli for his helpful comments and the participants of the Doctoral Seminar at the Pantheon-Sorbonne University of Paris1, of the Orleans Doctoral Development Days, of the Macro Ph.D. seminar at the PSE, of the Central Bank of Peru Research Seminar and of the Bi-annual meeting of the UP1 Doctoral School EPS. †University of Paris 1 Panthéon-Sorbonne, Paris School of Economics and CERDI. Corresponding email address: [email protected]. ‡University of Paris 1 Panthéon-Sorbonne, Paris School of Economics. Corresponding email address: [email protected]. §University of Paris 1 Panthéon-Sorbonne, Paris School of Economics. Corresponding email address: [email protected].