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Banking and Currency Crises: How Common Are The Twins?

  • Reuven GLICK

    (Federal Reserve Bank of San Francisco)

  • Michael HUTCHISON

    (Department of Economics, University of California, Santa Cruz)

The coincidence of having both banking and currency crises associated with the Asian financial crisis has drawn renewed attention to causal and common factors linking the two phenomena. In this paper, we analyse the incidence and underlying causes of banking and currency crises in 90 industrial and developing countries over the 1975-97 period. We measure the individual and joint ("twin") occurrence of bank and currency crises and assess the extent to which each type of crisis provides information about the likelihood of the other. We find that the twin crisis phenomenon is most common in financially liberalised emerging markets. The strong contemporaneous correlation between currency and bank crises in emerging markets is robust, even after factoring in a host of macroeconomic and financial structure variables and possible simultaneity bias. We also find that the occurrence of banking crises provides a good leading indicator of currency crises in emerging markets. The converse does not hold true, however, as currency crises are not a useful leading indicator of the onset of future banking crises. We conjecture that the openness of emerging markets to international capital flows, combined with a liberalised financial structure, make them particularly vulnerable to twin crises.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 012000.

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Length: 30 pages
Date of creation: Mar 2000
Date of revision:
Handle: RePEc:hkm:wpaper:012000
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  1. 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.
  2. Miller, Victoria, 1996. "Speculative currency attacks with endogenously induced commercial bank crises," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 383-403, June.
  3. 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.
  4. Reinhart, Carmen & Vegh, Carlos, 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," MPRA Paper 13898, University Library of Munich, Germany.
  5. Ramon Moreno, 1995. "Macroeconomic behavior during periods of speculative pressure or realignment: evidence from Pacific Basin economies," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
  6. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1995. "Financial Fragilities in Latin America: The 1980s and 1990s," IMF Occasional Papers 132, International Monetary Fund.
  7. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
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