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Abstract

We study the determinants of twin crises and investigate the direction of causality between banking and currency crises in emerging markets. We model banking and currency crises as dynamic events, correlated over time, and jointly estimate their probability using panel data simulation techniques. We show that banking and currency crises are closely intertwined and are driven by common fundamentals. Banking crises exhibit strong state dependence, suggesting that countries that have experienced a banking crisis in the past are more prone to experience another crisis. Finally, we find evidence of unobserved heterogeneity and autocorrelation in the error term structure. Copyright (c) The London School of Economics and Political Science 2007.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0335.2007.00613.x
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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 75 (2008)
Issue (Month): 298 (05)
Pages: 199-221

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Handle: RePEc:bla:econom:v:75:y:2008:i:298:p:199-221

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1. Vassilis A. Hajivassiliou & Axel Borsch-Supan, 1990. "Smooth Unbiased Multivariate Probability Simulators for Maximum Likelihood Estimation of Limited Dependent Variable Models," Cowles Foundation Discussion Papers 960, Cowles Foundation for Research in Economics, Yale University.
   
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2. Morris Goldstein & Carmen M. Reinhart, 2000. "Assessing Financial Vulnerability: An Early Warning System for Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 100, 1st quart.
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   • V A Hajivassiliou & DL McFadden, 1997. "The Method of Simulated Scores for the Estimation of LDV Models," STICERD - Econometrics Paper Series /1997/328, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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Cited by:

1. Diemo Dietrich & Tobias Knedlik & Axel Lindner, 2011. "Central and Eastern European countries in the global financial crisis: a typical twin crisis?," Post-Communist Economies, Taylor and Francis Journals, vol. 23(4), pages 415-432, April.
2. Corder, Matthew & Weale, Martin, 2011. "Banking crises and recessions: what can leading indicators tell us?," Discussion Papers 33, Monetary Policy Committee Unit, Bank of England.
3. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 1. Drivers of Systemic Banking Crises: The Role of Bank-Balance-Sheet Contagion and Financial Account Structure," OECD Economics Department Working Papers 902, OECD Publishing.

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