Abstract

FINANCIAL CRISES AND FINANCIAL MARKET REGULATION:

THE LONG RECORD OF AN ‘EMERGER’

Sophia Lazaretou

Bank of Greece

Abstract

The main goal of this paper is to trace the long record of financial crises and financial market regulation from the perspective of an emerging economy. Two questions are addressed: first, what explains the incidence and severity of financial crises in an emerging market economy? And, second, what is the role of learning: how does the country learn from its past experience in financial crises to improve institutions and develop better techniques so as to successfully manage successive crisis events? To answer the above questions, I first present evidence on financial crises in Greece over a long time span. Greece has been chosen as an appropriate case-study since it is a country with a rich history in financial crises. I try to identify a variety of crisis events, thus providing a chronology. Moreover, I present a number of facts about the incidence, frequency and severity of crises events. Second, I discuss the key determinants of the crises, which are closely related to country-specific factors, such as credit expansion, fiscal imbalances, and the limited reserve coverage of the monetary base. And third, I deal with the evolution of the regulation. I place emphasis on the post-crisis regulatory responses that changed the country’s institutional developments.

JEL classification: E5, N2

Keywords: financial crises, emerging economies, sudden stops, financial market regulation.

Acknowledgment: This paper was presented at XXX Conference of the Portuguese Economic and Social History Association on Economic and Social Crises, Lisbon, 19-20 November 2010. I am grateful to Amélia Branco, Rui Pedro Esteves, Rita Martins de Sousa and Nuno Valério for their useful comments. An earlier version was presented at the 5^th SEEMHN Annual Conference on Monetary policy during economic crises: A comparative and historical perspective, hosted by the Central Bank of the Republic of Turkey in Istanbul on 15-16 April 2010. I would like to thank the conference participants and especially George Chouliarakis, Kalina Dimitrova, Şevket Pamuk, Milan Sojic and Ali Coşkun Tuncer for their comments and suggestions. An earlier version of the first part of this paper was presented at the workshop on financial market regulation in the wake of financial crises: the historical experience, organized by the Banca d’Italia on 16-17 April 2009 in Rome. I would like to acknowledge helpful comments by the workshop’s participants and especially Alfredo Gigliobianco and Claire Giordano. I am most grateful to Luis Catao for kindly providing Stone’s data on foreign capital inflows to Greece. The views expressed here are those of the author and do not necessarily reflect those of the Bank of Greece. Any errors remain my responsibility.

Correspondence: Sophia Lazaretou, Economic Research Department, slazaretou@bankofgreece.gr