Do countries learn from their mistakes? Here we consider one example of this question with respect to banking crises using the concept of effective learning, that is, learning plus the ability to implement such learning. Excessive credit growth is widely considered to be the strongest contributor to banking crises. Thus, it is interesting to see whether banking crises are associated with lower rates of credit growth in the future and if so, what are major factors which influence such changes in behavior. In previous research we have found that, on average, banking crises are followed by substantially lower credit growth but this varies considerably across countries. Our hypothesis is that lower rates of future credit growth reflect a process of learning from one’s mistakes and taking corrective actions. This paper offers an investigation of some of the political economy factors that may influence whether crises result in greater discipline. Overall, we found very little average effective learning in stable autocracies and on the contrary, found considerable discipline in stable democracies. Nevertheless, we found even larger discipline effects in countries that transitioned to democracy in the wake of banking crises. Our results regarding the role of veto players and government turnovers are inconclusive.
