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Is There a Causal Link between Currency and Debt Crises?

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  • Axel Dreher

    (University of Exeter)

  • Bernhard Herz

    (University of Bayreuth)

  • Volker Karb

    (University of Bayreuth)

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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Suggested Citation

  • Axel Dreher & Bernhard Herz & Volker Karb, 2004. "Is There a Causal Link between Currency and Debt Crises?," International Finance 0404005, EconWPA, revised 16 Feb 2005.
  • Handle: RePEc:wpa:wuwpif:0404005
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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. Karatas, B., 2014. "Financial crisis and monetary policy," Other publications TiSEM 41e463f0-e122-4379-8db5-6, Tilburg University, School of Economics and Management.
    3. Bauer, Christian & Herz, Bernhard & Karb, Volker, 2007. "Are twin currency and debt crises special?," Journal of Financial Stability, Elsevier, vol. 3(1), pages 59-84, April.
    4. 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.
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    10. 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.
    11. Rövekamp, Ingmar & Eichler, Stefan, 2016. "A market-based indicator of currency risk: Evidence from American Depositary Receipts," Annual Conference 2016 (Augsburg): Demographic Change 145791, Verein für Socialpolitik / German Economic Association.
    12. Carmen M. Reinhart & Christoph Trebesch, 2015. "The Pitfalls of External Dependence: Greece, 1829–2015," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 307-328.
    13. 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.
    14. Miroslava Kostova Karaboytcheva & Luis Rubio Andrada, 2012. "The Impact of the Shadow Economy on the Country Risk Index," Chapters,in: Tax Evasion and the Shadow Economy, chapter 7 Edward Elgar Publishing.
    15. Ozkaya, Ata, 2013. "The Domestic Debt Intolerance and Bad Equilibrium: An Empirical Default Model," GIAM Working Papers 13-1, Galatasaray University Economic Research Center.
    16. 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.
    17. Dreher, Axel & Lamla, Michael J. & Lein, Sarah M. & Somogyi, Frank, 2009. "The impact of political leaders' profession and education on reforms," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 169-193, March.
    18. Maixé-Altés, J. Carles & Iglesias, Emma M., 2015. "Banking, Currency, Stock Market and Debt Crises: Revisiting Reinhart & Rogoff Debt Analysis in Spain, 1850-1995," MPRA Paper 68199, University Library of Munich, Germany.
    19. Miroslava Kostova Karaboytcheva & Carolina Silva Cassorla, 2015. "The shadow economy: a relevant factor for investment decisions in selected European Union countries," Financial Theory and Practice, Institute of Public Finance, vol. 39(3), pages 305-323.
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    21. 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.
    22. 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, May.
    23. Erler, Alexander & Bauer, Christian & Herz, Bernhard, 2014. "Defending against speculative attacks – It is risky, but it can pay off," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 309-330.
    24. 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.
    25. 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.

    More about this item

    Keywords

    Currency Crises; Debt Crises; Contagion;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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