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What do Twins Share? A Joint Probit Estimation of Banking and Currency Crises

  • ELISABETTA FALCETTI
  • MERXE TUDELA

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. 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.
  2. Chang, R. & Velasco, A., 1999. "Liquidity Crises in Emerging Markets: Theory and Policy," Working Papers 99-14, C.V. Starr Center for Applied Economics, New York University.
  3. Miller, Victoria, 1999. "The timing and size of bank-financed speculative attacks," Journal of International Money and Finance, Elsevier, vol. 18(3), pages 459-470.
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  7. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  8. 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.
  9. Reuven Glick & Ramon Moreno & Mark Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar.23.
  10. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
  11. Borsch-Supan, Axel & Hajivassiliou, Vassilis A., 1993. "Smooth unbiased multivariate probability simulators for maximum likelihood estimation of limited dependent variable models," Journal of Econometrics, Elsevier, vol. 58(3), pages 347-368, August.
  12. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
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