Financial crises after financial liberalisation: Exceptional circumstancesor structural weakness?

In this article, I argue that emerging economies are systematically becomin g more susceptible to both currency and banking crises after financial libe ralisation (FL). Using data for 27 emerging economies from 1973 to 1998, un ivariate and multivariate analyses indicate that the likelihood of currency crises and banking crises increase after FL In particular liberalisation a llows more liquidity to enter an emerging economy, which finds its it,ay in to productive and speculative projects. What is common to both types of cri ses is a significant increase in speculative financing, thereby increasing the chance for borrower default. Thus, the outflow of international capital becomes more likely. The chance of a crisis occurring in response to chang es in short-term loans is greater after FL than before. Similarly, the chan ce of a currency crisis occurring following a currency overvaluation is lar ger after FL than before. In comparison, the likelihood of a banking crisis occurring in response to an overvalued currency remains the same. Finally, the results show that the chance of a currency crisis declines over time, while the chance of a banking crisis increases after FL.