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Are twin currency and debt crises special?

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  • Christian Bauer
  • Bernhard Herz
  • Volker Karb

Abstract

In the literature on currency and banking crises it has become the standard procedure to distinguish pure currency crises, pure banking crises and combined (“twin”) currency and banking crises. We show theoretically and empirically that a similar differentiation should be chosen with regard to currency and debt crises. Twin currency and debt crises differ from both pure currency and pure debt crises in their determinants, course of events, and economic consequences. We find that each type of crises has a unique set of macroeconomic causes. We also identify internal contagion and selection bias effects, which may lead to biased empirical estimates if twin crises are not treated as a specific type of crises. Such a separation allows to significantly improve the efficiency of early warning systems especially for debt and twin crises.

Suggested Citation

  • Christian Bauer & Bernhard Herz & Volker Karb, 2006. "Are twin currency and debt crises special?," Working Papers 019, Bavarian Graduate Program in Economics (BGPE).
    • Handle: RePEc:bav:wpaper:019_bauer_herz_karb
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    Cited by:

    1. Cheng, Jin & Dai, Meixing & Dufourt, Frédéric, 2017. "Banking and sovereign debt crises in a monetary union without central bank intervention," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 142-151.
    2. Christian Bauer & Bernhard Herz, 2009. "The Dynamics of Financial Crises and the Risk to Defend the Exchange Rate," Research Papers in Economics 2009-03, University of Trier, Department of Economics.
    3. GHERBOVET, Sergiu, 2016. "Prospects For Triggering The Crisis And Related Investment Opportunities," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 3(1), pages 238-244, October.
    4. Hallak, Issam, 2009. "Renegotiation and the pricing structure of sovereign bank loans: Empirical evidence," Journal of Financial Stability, Elsevier, vol. 5(1), pages 89-103, January.
    5. Lang, Michael & Schmidt, Paul G., 2016. "The early warnings of banking crises: Interaction of broad liquidity and demand deposits," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 1-29.
    6. repec:cud:journl:v:30:y:2007:i:83:p:075-100 is not listed on IDEAS
    7. Bauer, Christian & Herz, Bernhard & Karb, Volker, 2006. "How likely are macroeconomic crises in the CIS?," Research in International Business and Finance, Elsevier, vol. 20(2), pages 227-238, June.
    8. Bauer, Christian & Herz, Bernhard & Hoops, Stefan, 2008. "A Cheap Lunch for Emerging Markets: Removing International Financial Market Imperfections with Modern Financial Instruments," World Development, Elsevier, vol. 36(9), pages 1514-1530, September.
    9. Andrea Eross & Andrew Urquhart & Simon Wolfe, 2019. "Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and eurozone interbank markets," The European Journal of Finance, Taylor & Francis Journals, vol. 25(1), pages 35-53, January.
    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, May.

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    More about this item

    Keywords

    currency crises; debt crises; twin crises; emerging markets;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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