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

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  • Reinhart, Carmen
  • Kaminsky, Graciela

Abstract

In the wake of the Mexican and Asian currency turmoil, the subject of financial crises has come to the forefront of academic and policy discussions. This paper analyzes the links between banking and currency crises. We find that: problems in the banking sector typically precede a currency crisis--the currency crisis deepens the banking crisis, activating a vicious spiral; financial liberalization often precedes banking crises. The anatomy of these episodes suggests that crises occur as the economy enters a recession, following a prolonged boom in economic activity that was fueled by credit, capital inflows and accompanied by an overvalued currency.

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File URL: http://mpra.ub.uni-muenchen.de/14081/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14081.

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Date of creation: Jun 1999
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Publication status: Published in American Economic Review 3.89(1999): pp. 473-500
Handle: RePEc:pra:mprapa:14081

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Keywords: banking crises credit currency crash stock prices capital flows exports recession;

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  1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1453, C.E.P.R. Discussion Papers.
  2. Sebastian Edwards & Peter Montiel, 1989. "Devaluation Crises and the Macroeconomic Consequences of Postponed Adjustment in Developing Countries," NBER Working Papers 2866, National Bureau of Economic Research, Inc.
  3. Guillermo A. Calvo, 1995. "Varieties of Capital-Market Crises," Research Department Publications, Inter-American Development Bank, Research Department 4008, Inter-American Development Bank, Research Department.
  4. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  5. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The “Overborrowing Syndrome”," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
  6. Velasco, Andres, 1987. "Financial crises and balance of payments crises : A simple model of the southern cone experience," Journal of Development Economics, Elsevier, Elsevier, vol. 27(1-2), pages 263-283, October.
  7. Charles W. Calomiris & Gary Gorton, 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," NBER Chapters, in: Financial Markets and Financial Crises, pages 109-174 National Bureau of Economic Research, Inc.
  8. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 1037-1047, April.
  9. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  10. Calvo, Guillermo A & Mendoza, Enrique G, 1996. "Petty Crime and Cruel Punishment: Lessons from the Mexican Debacle," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 170-75, May.
  11. Graciela L. Kaminsky & Leonardo Leiderman, 1996. "High real interest rates in the aftermath of disinflation: is it a lack of credibility?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 543, Board of Governors of the Federal Reserve System (U.S.).
  12. Francis X. Diebold & Glenn D. Rudebusch, 1987. "Scoring the leading indicators," Special Studies Papers, Board of Governors of the Federal Reserve System (U.S.) 206, Board of Governors of the Federal Reserve System (U.S.).
  13. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  14. Fukuda, Shin-ichi & Hoshi, Takeo & Ito, Takatoshi & Rose, Andrew, 2006. "International Finance," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 455-458, December.
  15. Gary Gorton, 1986. "Banking panics and business cycles," Working Papers 86-9, Federal Reserve Bank of Philadelphia.
  16. Reinhart, Carmen & Calvo, Sara, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?”," MPRA Paper 7124, University Library of Munich, Germany.
  17. Miller, Victoria, 2000. "Central bank reactions to banking crises in fixed exchange rate regimes," Journal of Development Economics, Elsevier, Elsevier, vol. 63(2), pages 451-472, December.
  18. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, Elsevier, vol. 19(1-2), pages 1-24.
  19. Pierre-Richard Agénor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
  20. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," IMF Working Papers 92/62, International Monetary Fund.
  21. Reinhart, Carmen & Reinhart, Vincent, 1996. "Forecasting turning points in Canada," MPRA Paper 13884, University Library of Munich, Germany.
  22. 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.
  23. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(1), pages 148-66, February.
  24. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
  25. Vicente Galbis, 1993. "High Real Interest Rates Under Financial Liberalization," IMF Working Papers 93/7, International Monetary Fund.
  26. Stock, J.H. & Watson, M.W., 1989. "New Indexes Of Coincident And Leading Economic Indicators," Papers, Harvard - J.F. Kennedy School of Government 178d, Harvard - J.F. Kennedy School of Government.
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  1. Ideen und Interessen
    by Tobias Straumann in Never mind the markets on 2012-07-31 04:00:32
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