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Cambridge Journal of Economics Advance Access originally published online on December 6, 2005
Cambridge Journal of Economics 2006 30(4):567-585; doi:10.1093/cje/bei097
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Right arrow E44 - Financial Markets and the Macroeconomy
Right arrow E52 - Monetary Policy (Targets, Instruments, and Effects)
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Right arrow N26 - Latin America; Caribbean
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© The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Article

The political economy of the Ecuadorian financial crisis

Gabriel X. Martinez*

* Ave Maria University, Naples, FL

Address for correspondence: Gabriel X. Martinez, Assistant Professor of Economics, Ave Maria University, 1025 Commons Circle, Naples, FL 34119, USA; email: gmartinez{at}avemaria.edu

Abstract

This paper takes the unusual step of exploring economic hypotheses through interviews with key economic agents. It focuses on the causes of Ecuador's 1999 banking collapse, within an eclectic framework with Minskian elements. Broad support is found for ‘endogenous’ explanations of financial crises and little backing for explanations such as accidents or policy mistakes. Interviewees argued that after the stabilisation programme of 1992, agents became euphoric and accumulated debt to finance imprudent levels of expansion; that incentives for moral hazard led to financial corruption and excessive risk taking; and that weak regulation after financial liberalisation encouraged financial fragility.

Key Words: Financial crises • Euphoria • Moral hazard • Financial liberalisation • Minsky

JEL classifications: E44, E52, G28, N26

Manuscript received August 28, 2003; final version received May 23, 2005.


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