Essays on the role of government in emerging market financial crises

The dissertation contains three chapters.; The first chapter analyzes the effect of government quality on unofficial dollarization in emerging market countries. The unofficial dollarization of the domestic banking system represents a major source of vulnerability for emerging market countries, and a debate has emerged over whether the exchange rate regime has an impact on the degree of dollarization. This chapter argues that the regime is far less important than the literature has previously claimed. Unofficial dollarization results from a lack of faith in the domestic currency which ultimately stems from the belief that the government will not follow policies that promote long run currency stability. Empirical results indicate that improved government quality reduces unofficial dollarization while the exchange rate regime is insignificant.; The second chapter identifies key variables that are predictive of banking crises using a probit model. I focus on the role played by unofficial dollarization of domestic banking systems, a factor that has not been studied in this context. Liability dollarization, determined in chapter one to be the result of a lack of government quality and credibility, is a major source of vulnerability for emerging markets as large depreciations render both domestic firms and banks unable to pay their dollar debts. Given the low incidence of crises during the sample period, however, it is not surprising that I find only weak evidence that unofficial dollarization affects the probability of a banking crisis.; The third chapter (joint with Sonali Jain-Chandra) examines the role of government guarantees to domestic banks in generating moral hazard in pre-crisis East Asian economies. We test for moral hazard among bank creditors by determining whether protected banks received more funds from creditors than otherwise identical banks that did not enjoy such guarantees. To determine empirically the existence of moral hazard among bank managers, we examine whether managers of protected banks assumed more risk than their counterparts at non-protected banks. We find strong evidence of moral hazard among bank managers and some evidence of moral hazard among bank creditors.