The Political Economy of Banking Crises in Emerging Economies: The Veto Player Framework

The recent research on the consequences of financial crises has attempted to determine which crisis-management policies and which economic policies were responsible for the severe costs of these crises. Less attention has been paid to the role of domestic political institutions that directly influence a government’s ability to implement these policies. This paper investigates the impact of domestic institutions, characterized by the veto player framework, on the severity of banking crises measured in terms of the magnitude of output losses. The analysis extends MacIntyre’s (2001) study of the relationship between veto players and policy risks in the Asian financial crises. From the sample of emerging market economies, the empirical findings show that countries with an absence of veto powers in their political system or with excessive veto players would suffer from substantially larger output losses once banking crises occur because of their lack of credibility or the inflexibility of policy responses