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The twin crises: the causes of banking and balance-of-payments problems

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Author Info
Graciela L. Kaminsky
Carmen M. Reinhart

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Abstract

In the wake of the ERM and Mexican currency crises, the subject of balance-of-payments crises has come to the forefront of academic and policy discussions. This paper focuses on the potential links between banking and balance-of-payments crises. We examine these episodes for a large number of countries and find that knowing that there are banking problems helps in predicting balance-of-payments crises, but the converse is not true; financial liberalization usually predates banking crises, indeed, it helps predict them. Rather than a causal relationship from banking to balance-of-payments crises, the macroeconomic "stylized facts" that characterize these episodes point to common causes.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 544.

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Date of creation: 1996
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Handle: RePEc:fip:fedgif:544

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Keywords: Balance of payments ; Bank failures;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Contagious Currency Crises," NBER Working Papers 5681, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24. [Downloadable!] (restricted)
  3. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Charles W. Calomiris & Gary Gorton, . "The Origins of Banking Panics: Models, Facts, and Bank Regulation," Rodney L. White Center for Financial Research Working Papers 11-90, Wharton School Rodney L. White Center for Financial Research.
    Other versions:
  5. Calvo, Guillermo A & Mendoza, Enrique G, 1996. "Petty Crime and Cruel Punishment: Lessons from the Mexican Debacle," American Economic Review, American Economic Association, vol. 86(2), pages 170-75, May. [Downloadable!] (restricted)
  6. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-66, February. [Downloadable!] (restricted)
  7. Kaminsky, Graciela L. & Leiderman, Leonardo, 1998. "High real interest rates in the aftermath of disinflation: is it a lack of credibility?," Journal of Development Economics, Elsevier, vol. 55(1), pages 191-214, February. [Downloadable!] (restricted)
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  8. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Diebold, Francis X & Rudebusch, Glenn D, 1989. "Scoring the Leading Indicators," Journal of Business, University of Chicago Press, vol. 62(3), pages 369-91, July. [Downloadable!] (restricted)
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  10. Frederic S. Mishkin, 1997. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Reinhart, Carmen & Reinhart, Vincent, 1996. "Forecasting turning points in Canada," MPRA Paper 13884, University Library of Munich, Germany. [Downloadable!]
  12. Stock, J.H. & Watson, M.W., 1989. "New Indexes Of Coincident And Leading Economic Indicators," Papers 178d, Harvard - J.F. Kennedy School of Government.
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  13. Miller, Victoria, 2000. "Central bank reactions to banking crises in fixed exchange rate regimes," Journal of Development Economics, Elsevier, vol. 63(2), pages 451-472, December. [Downloadable!] (restricted)
  14. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  15. Reinhart, Carmen & Vegh, Carlos, 1999. "Do Exchange Rate-Based Stabilizations Carry the Seeds of Their Own Destruction?," MPRA Paper 8952, University Library of Munich, Germany. [Downloadable!]
  16. Guillermo A. Calvo, 1995. "Varieties of Capital-Market Crises," RES Working Papers 4008, Inter-American Development Bank, Research Department. [Downloadable!]
  17. Reinhart, Carmen & Calvo, Sara, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?”," MPRA Paper 7124, University Library of Munich, Germany. [Downloadable!]
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  18. Gorton, Gary, 1988. "Banking Panics and Business Cycles," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 751-81, December. [Downloadable!] (restricted)
  19. Velasco, Andres, 1987. "Financial crises and balance of payments crises : A simple model of the southern cone experience," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 263-283, October. [Downloadable!] (restricted)
  20. Vicente Galbis, 1993. "High Real Interest Rates Under Financial Liberalization: Is There a Problem?," IMF Working Papers 93/7, International Monetary Fund.
  21. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August. [Downloadable!] (restricted)
  22. Guillermo Calvo & Carmen Reinhart & Leonardo Leiderman, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
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