The cost of banking crises: new evidence from life satisfaction data

Abstract

It is known that banking crises produce large economic costs. Yet might their consequences be even more far-reaching? We investigate an issue largely unexplored and provide some of the first evidence that banking crises also lead to major, widespread and lasting, psychic losses. We estimate the costs of banking crises with individual life satisfaction; we show that these extend beyond GDP declines and other macroeconomic and financial leakages. For the 2007-8 financial crisis, we find some evidence that the losses are larger for those countries that had previously experienced a credit boom.