In Acemoglu, Johnson, and Robinson, henceforth AJR, (2001), we advanced the hypothesis that the mortality rates faced by Europeans in different parts of the world after 1500 affected their willingness to establish settlements and choice of colonization strategy. Places that were relatively healthy (for Europeans) were—when they fell under European control—more likely to receive better economic and political institutions. In contrast, places where European settlers were less likely to go were more likely to have “extractive” institutions imposed. We also posited that this early pattern of institutions has persisted over time and influences the extent and nature of institutions in the modern world. On this basis, we proposed using estimates of potential European settler mortality as an instrument for institutional variation in former European colonies today. Data on settlers themselves are unfortunately patchy—particularly because not many went to places they believed, with good reason, to be most unhealthy. We therefore followed the lead of Curtin (1989 and 1998) who compiled data on the death rates faced by European soldiers in various overseas postings. 1 Curtin’s data were based on pathbreaking data collection and statistical work initiated by the British military in the mid-nineteenth century. These data became part of the foundation of both contemporary thinking about public health (for soldiers and for civilians) and the life insurance industry (as actuaries and executives considered the

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The Colonial Origins of Comparative Development: An Empirical Investigation

1. Introduction and Overview. 2. Detecting Influential Observations and Outliers. 3. Detecting and Assessing Collinearity. 4. Applications and Remedies. 5. Research Issues and Directions for Extensions. Bibliography. Author Index. Subject Index.

Regression Diagnostics: Identifying Influential Data and Sources of Collinearity

Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned. Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur. An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.

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This Time Is Different: Eight Centuries of Financial Folly

This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.

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Deciphering the Liquidity and Credit Crunch 2007-08

https://personal.lse.ac.uk/FERREIRD/gender.pdf

Women in the boardroom and their impact on governance and performance

Faced with a systemic financial sector crisis, policymakers need to make difficult choices under pressure. Based on the experience of many countries in recent years, few have been able to achieve a speedy, lasting and low-cost resolution. This volume considers the strengths and weaknesses of the various policy options, covering both microeconomic (including recapitalization of banks, bank closures, subsidies for distressed borrowers, capital adequacy rules and corporate governance and bankruptcy law requirements) and macroeconomic (including monetary and fiscal policy) dimensions. The contributors explore the important but little understood trade-offs that are involved, such as between policies which take effect quickly, those which minimize long-term fiscal and economic costs, and those which create favorable incentives for future stability. Successfully implementing crisis management and crisis resolution policy required attention to detail and a good flow of information.

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Systemic Financial Crises

We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s new loans) is negatively associated with increases in short-term policy interest rates. This relationship is more pronounced in regions that are less in sync with the nationwide business cycle, and less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally. JEL classifications: E43, E52, G21

Bank Leverage and Monetary Policy's Risk-Taking Channel

Employment in developing countries is disproportionately concentrated in very small firms. We examine the extent to which the distribution of firm size is related to the quality of the legal system using data from Mexico. We combine Lucas' (1978) model of firm size with Himmelberg, Hubbard and Love's (2001) consideration of idiosyncratic risk in a framework in which the distribution of entrepreneurial talent and aversion to idiosyncratic risk combine to determine the optimal size of firms. Our data allow us to focus on the differential impact of the legal system on proprietorships and corporations. Moreover, by focusing on firms in a single country, the data draw attention to the importance of variation in the administration of justice and the enforcement of legal verdicts. We find that Mexican states with more effective legal systems have larger firms. A one standard deviation improvement in the quality of the legal system increases the average firm size by about 10-15 percent. The impact of the legal system is greatest in sectors in which proprietorships dominate. This pattern is consistent with better legal systems increasing the investment of firm owners by reducing the idiosyncratic risk faced by owners. All of these findings are upheld when we instrument for the institutional variables using the log of indigenous population in 1900 and the active presence of the drug trade in the state.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID509582_code261593.pdf?abstractid=509582&mirid=1

The Quality of the Legal System and Firm Size

This paper illustrates the trends in deposit insurance adoption. It discusses the cross-country differences in design, and synthesizes the policy messages from cross-country empirical work as well as individual country experiences. The paper develops practical lessons from this work and distills the evidence into a set of principles of good design. Cross-country empirical research and individual-country experience confirm that, for at least the time being, officials in many countries would do well to delay the installation of a deposit insurance system.

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Deposit insurance design and implementation : policy lessons from research and practice

Competition in the financial sector matters for a number of reasons. As in other industries, the degree of competition in the financial sector can affect the efficiency of the production of financial services. Also, again as in other industries, it can affect the quality of financial products and the degree of innovation in the sector. Specific to the financial sector is the link between competition and stability that has long been recognized in theoretical and empirical research and, most importantly, in the actual conduct of prudential policy towards banks. Importantly, it has also been shown, theoretically as well as empirically, that the degree of competition in the financial sector can effect the access of firms and households to financial services and external financing. The direction of the latter relationship is, however, unclear. Less competitive systems may lead to more access to external financing since banks are more inclined to invest in information acquisition and relationships with borrowers. When banking systems are less competitive, however, hold-up problems may lead borrowers to be less willing to enter such relationships. Furthermore, less competitive banking systems can be more costly and exhibit a lower quality of services thus providing less financing and encouraging less growth. These effects may further vary by the degree of a country’s financial sector development.

Luc Laeven

Papers

Systemic Financial Crises

Bank Leverage and Monetary Policy's Risk-Taking Channel

The Quality of the Legal System and Firm Size

Deposit insurance design and implementation : policy lessons from research and practice

Competition in the Financial Sector and Growth: A Cross-Country Perspective