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Is there a causal link between currency and debt crises?

  • Axel Dreher

    (ETH-Swiss Federal Institute of Technology Zurich, KOF, ETH Zentrum WEH, 8092 Zurich, Switzerland)

  • Bernhard Herz

    (University of Bayreuth, Universitätsstrasse 30, 95447 Bayreuth, Germany)

  • Volker Karb

    (University of Bayreuth, Universitätsstrasse 30, 95447 Bayreuth, Germany)

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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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 11 (2006)
Issue (Month): 4 ()
Pages: 305-325

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Handle: RePEc:ijf:ijfiec:v:11:y:2006:i:4:p:305-325
DOI: 10.1002/ijfe.300
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