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Banking Crises and Economic Freedom

We examine the connection between banking crises and measures of economic freedom disseminated by the Fraser Institute. We find that higher economic freedom – more personal choice, freedom of exchange, and protection of private property – is associated with a lower probability of a banking crisis. This is contrary to conventional wisdom that financial “deregulation” contributes to financial and banking crises. This finding appears in estimates from both a linear probability and a probit model. This finding also is unaffected by inclusion of the growth of real Gross Domestic Product (GDP), deposit insurance, time or country dummy variables or the level of real GDP.