Banking crises, regulation, and growth: the case of Russia

Recent empirical analyses of the relationship between financial system development and economic growth find that financial system development causes economic growth, is a good predictor of growth and that its impact is relatively large. Moreover, the empirical literature predicts that the adverse effects of banking crises on economic growth will rise in the absence of an adequate response by the government. Hence, given the Russian government's failure to respond adequately to the 1998 banking crisis, Russia's strong economic growth since the crisis is a puzzle. This study uses simulations to conclude that the growth costs of the 1998 crisis were larger than previously suggested. The adverse effects were compensated by expansionary effects. The findings corroborate the importance of financial development in promoting growth in transition countries.