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Asset prices and twin crises

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  • Singh, Rajesh

Abstract

Emerging market crises have been characterized by two key features: (i) banking crises generally precede currency crises, and (ii) asset prices decline in advance of currency crises. This paper argues that asset prices provide a key link between banking and currency crises. It is shown that a prospective currency crisis due to an unanticipated increase in the public debt triggers an asset price decline. Banks' exposure to asset prices in turn deteriorates their balance sheets and precipitates a banking crisis. Under the assumption of government bailout of banks, it is shown that the 'twin' crises are self-fulfilling and their time-line follows (i) and (ii) described above. The timing of currency crisis is decreasing in the ratio of government's bailout to banks' loss of capital.

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  • Singh, Rajesh, 2009. "Asset prices and twin crises," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 26-55, February.
    • Handle: RePEc:eee:jimfin:v:28:y:2009:i:1:p:26-55
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    1. Cheng, Jin & Dai, Meixing & Dufourt, Frédéric, 2017. "Banking and sovereign debt crises in a monetary union without central bank intervention," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 142-151.

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