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Is There a Causal Link between Currency and Debt Crisis?

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  • Axel Dreher
  • Bernhard Herz
  • Volker Karb

Abstract

Though currency and debt crises quite often occur simultaneously, the links between these two types of crises are not well understood. We review how currency and debt crises could be related due to common causes, contagion effects from one crisis to the other, and complementary budget financing aspects. In an empirical analysis based on a panel of 80 countries over the period 1975-2000, we first investigate the determinants of each crisis separately. Then we estimate links between both crises employing instrumental variables techniques. We find that, while there is a negative lagged influence of currency crises on debt crises, currency crises significantly increase the risk of contemporaneous debt crises and vice versa. Copyright © 2006 John Wiley & Sons, Ltd.

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Bibliographic Info

Paper provided by Thurgauer Wirtschaftsinstitut, Universität Konstanz in its series TWI Research Paper Series with number 3.

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Date of creation: 2005
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Handle: RePEc:twi:respas:0003

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Keywords: debt crises; currency crises; contagion;

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Cited by:
  1. Ata Ozkaya, 2013. "Public Debt Stock Sustainability in Selected OECD Countries," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 13(1), pages 31-49.
  2. Steiner, Andreas, 2013. "How central banks prepare for financial crises – An empirical analysis of the effects of crises and globalisation on international reserves," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 208-234.
  3. Eichler, Stefan & Hielscher, Kai, 2012. "Does the ECB act as a lender of last resort during the subprime lending crisis?: Evidence from monetary policy reaction models," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 552-568.
  4. Eichler, Stefan, 2012. "Financial crisis risk, ECB “non-standard” measures, and the external value of the euro," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 257-265.
  5. Axel Dreher & Roland Vaubel, 2005. "Foreign Exchange Intervention And The Political Business Cycle: A Panel Data Analysis," International Finance 0505009, EconWPA.
  6. Eichler, Stefan & Karmann, Alexander & Maltritz, Dominik, 2009. "The ADR shadow exchange rate as an early warning indicator for currency crises," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1983-1995, November.
  7. Eijffinger, Sylvester C W & Karatas, Bilge, 2013. "Three Sisters: The Interlinkage between Sovereign Debt, Currency and Banking Crises," CEPR Discussion Papers 9369, C.E.P.R. Discussion Papers.
  8. Eichler, Stefan, 2011. "Exchange rate expectations and the pricing of Chinese cross-listed stocks," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 443-455, February.
  9. Dreher, Axel & Sturm, Jan-Egbert & Haan, Jakob de, 2010. "When is a central bank governor replaced? Evidence based on a new data set," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 766-781, September.
  10. Stefan Eichler & Dominik Maltritz, 2011. "Stock Market‐Induced Currency Crises—A New Type of Twins," Review of Development Economics, Wiley Blackwell, vol. 15(2), pages 223-236, 05.
  11. Ozkaya, Ata, 2013. "The Domestic Debt Intolerance and Bad Equilibrium: An Empirical Default Model," GIAM Working Papers 13-1, Galatasaray University Economic Research Center.
  12. Martin Gassebner & Richard Jong‐A‐Pin & Jochen O. Mierau, 2011. "Terrorism And Cabinet Duration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(4), pages 1253-1270, November.
  13. Ata Ozkaya, 2013. "The Effects of Debt Intolerance and Public Debt Sustainability on Credit Ratings: Evidence From European Economies," Working Papers 011, Bahcesehir University, Betam.
  14. Manuel J. Rocha Armada & João Leitão & Júlio Lobão, 2012. "The Contagion Effects of Financial Crisis on Stock Markets: What Can We Learn From a Cointegrated Vector Autoregressive Approach for Developed Countries?," Remef - The Mexican Journal of Economics and Finance, Instituto Mexicano de Ejecutivos de Finanzas. Remef, October.

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