Correlates of Learning from Banking Crisis: IMF and Central Bank Independence

• In Event: Consequences of Economic Crisis

Abstract

Do banking crises lead to learning by countries and provide discipline over the behavior of factors that caused the crisis in the first place, such as excessive private credit growth? To have such discipline it is necessary to have not only learning but the ability to implement change based on this learning, which we call effective policy learning. Consistent with this hypothesis, in earlier work (Amri et al. 2017), we found that banking crises lead to substantially lower post crisis credit growth on average, yet there was considerable variability across countries. In Amri et. al. (2020) we explored the role of a number of domestic factors such as democracy in influencing the degree of effective policy learning. In this paper we further extend our analysis to consider two potentially important factors that are external to the domestic political process, the role of International Monetary Fund (IMF) programs and central bank independence. While the vast majority of IMF loans require crisis-hit countries to adopt financial reforms, the effects of these programs on future financial stability have been controversial. For example, Papi et al. (2015) found that IMF programs reduced the risk of future crises, while Aizenman and Noy (2013) found that countries who borrowed from the IMF experience more frequent and deeper crises in the future. Not only do such results conflict but they leave open the mechanisms through which effective learning does or does not occur. Similarly, while central bank independence has generally been effective in restraining inflation (especially in advanced economies), its effects on reducing future crises risks are more ambiguous (Fraccioli et al. 2020). Using a difference-in-difference analysis of 59 episodes of private credit-fueled banking crisis from 1970-2018, our preliminary analysis shows that crisis-hit countries with IMF programs experience a larger reduction in post-crisis credit growth (i.e., more effective learning), but this effect is only significant in the presence of independent central banks. Therefore, IMF programs and the degree of central bank independence seem to have complementary effects on whether or not there is effective policy learning. We discuss reasons why this seems a plausible result.

Authors

• Puspa D Amri, Sonoma State University

• Thomas D. Willett, Claremont Graduate University