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We find that banking crises have a sizable, multiyear cumulative negative effect on investment in capital. Moreover, in countries that have experienced several banking crises over the years, each additional crisis lowers the ratio of investment to gross domestic product by more than the previous crisis. In addition, the recovery of investment following a banking crisis is conditional on earlier crises in the same country. The recovery is slower in countries that have experienced crises in the past. The results are obtained using data for seventy-five countries for the period 1976–2005.
