| While today an extensive interventionist framework at both the national and international level is often viewed as a necessary prerequisite to reduce the incidence and limit the severity of financial crises, history shows otherwise. During the comparatively laissez-faire era of the classical gold standard, many developing nations enjoyed ready access to international capital for decades, yet the evidence suggests that they were not prone to costly crises. Instead, the output loss associated with crises in the 1880--1914 period is indistinguishable from zero. For decades, the least-regulated trio of Australia, Canada and Sweden successfully combined internal and external stability with a high degree of capital market integration---a feat that has escaped modern emerging nations. On the other hand, crises were common in interventionist Latin America and in the heavily regulated U.S. banking system. The level of interventionism in the banking sector can explain both the incidence and severity of banking and twin crises. |
