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Democracy and Financial Crisis

  • Phillip Y. Lipscy

Existing scholarship attributes various political and economic advantages to democratic governance. These advantages may make more democratic countries prone to financial crises. Democracy is characterized by constraints on executive authority, accountability through free and fair elections, protections for civil liberties, and large winning coalitions. These characteristics bring important benefits, but they can also have unintended consequences that increase the likelihood of financial instability and crises. Using data covering the past two centuries, I demonstrate a strong relationship between democracy and financial crisis onset: on average, democracies are about twice as likely to experience a crisis as autocracies. This is an empirical regularity that is robust across a wide range of model specifications and time periods.

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I thank Jonathan Bendor, Lawrence Broz, Ruth Collier, Gary Cox, Barry Eichengreen, Jim Fearon, Jeffry Frieden, Justin Grimmer, Saumitra Jha, Steve Krasner, Helen Milner, T.J. Pempel, Jonathan Rodden, Kenneth Schultz, Michael Tomz, Steve Vogel, and participants of meetings at APSA, IPES, UC Berkeley, and Stanford for their helpful comments and suggestions. I also thank Trevor Incerti, Erica Kang, Xiaojun Li, Lizhi Liu, Ken Opalo, Sungmin Rho, Zheng Wu, and Matt Wujek for excellent research assistance. This research benefited from the generous support of Sakurako and William Fisher, the Hellman Faculty Scholar fund, and the Shorenstein Asia-Pacific Research Center at Stanford University.

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