Pre‐Crisis Conditions and Financial Crisis Duration

ABSTRACT This paper examines how pre‐crisis conditions affect the duration of different types of financial crises using a data sample of 311 financial crises in 89 countries over the period 1985–2019. Results from our parametric survival analysis show that the duration of any type of financial crisis is longer for countries having higher levels of public debt prior to financial crises, whereas it is shorter for countries characterised by higher pre‐crisis levels of (i) current account balance, (ii) international reserves, (iii) GDP growth and (iv) institutional quality. Similarly, while pegged exchange rate regimes, productivity shocks and negative commodity price shocks are associated with a longer duration of financial crises, majority governments help countries emerge faster from crises. Moreover, pre‐crisis expansion of fiscal and monetary policies helps to shorten financial crises. We also find a positive effect of pre‐crisis fiscal balance on the probability of crisis ending, and it is noteworthy that this effect is strengthened under majority governments and a stronger institutional environment. Our empirical findings offer some important policy implications.