Banking and Currency Crises: How Common are the Twins?

HKIMR Working Paper No. 01/2000

31 Pages Posted: 28 Aug 2007

See all articles by Reuven Glick

Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies

Michael M. Hutchison

University of California, Santa Cruz - Department of Economics

Date Written: March 2000

Abstract

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 liberalized 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.

Suggested Citation

Glick, Reuven and Hutchison, Michael M., Banking and Currency Crises: How Common are the Twins? (March 2000). HKIMR Working Paper No. 01/2000 . Available at SSRN: https://ssrn.com/abstract=1009506

Reuven Glick (Contact Author)

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3184 (Phone)
415-974-2168 (Fax)

Michael M. Hutchison

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

Social Sciences I
Santa Cruz, CA 95064
United States
831-459-2600 (Phone)
831-459-5900 (Fax)

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