What Do Twins Share? A Joint Probit Estimation of Banking and Currency Crises

23 Pages Posted: 7 Apr 2008

See all articles by Elisabetta Falcetti

Elisabetta Falcetti

European Bank for Reconstruction and Development (EBRD)

Merxe Tudela

Bank of England - Market Infrastructure Division

Abstract

We study the determinants of twin crises and investigate the direction of causality between banking and currency crises in emerging markets. We model banking and currency crises as dynamic events, correlated over time, and jointly estimate their probability using panel data simulation techniques. We show that banking and currency crises are closely intertwined and are driven by common fundamentals. Banking crises exhibit strong state dependence, suggesting that countries that have experienced a banking crisis in the past are more prone to experience another crisis. Finally, we find evidence of unobserved heterogeneity and autocorrelation in the error term structure.

Suggested Citation

Falcetti, Elisabetta and Tudela, Merxe, What Do Twins Share? A Joint Probit Estimation of Banking and Currency Crises. Economica, Vol. 75, Issue 298, pp. 199-221, May 2008, Available at SSRN: https://ssrn.com/abstract=1117056 or http://dx.doi.org/10.1111/j.1468-0335.2007.00613.x

Elisabetta Falcetti (Contact Author)

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

Merxe Tudela

Bank of England - Market Infrastructure Division ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
+44 (0)207 601 3840 (Phone)

HOME PAGE: www.bankofengland.co.uk

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