How Bad are Twins? Output Costs of Currency and Banking Crises

UCSC International Economics Working Paper No. 02-1

36 Pages Posted: 26 Mar 2002

See all articles by Michael M. Hutchison

Michael M. Hutchison

University of California, Santa Cruz - Department of Economics

Ilan Noy

Victoria University of Wellington

Date Written: January 2002

Abstract

We investigate the output effects of severe banking and currency crises in emerging markets, focusing on whether "twin crises" (simultaneous occurrence of currency and banking crises) exist as a unique phenomenon and whether they entail especially large losses. Recent literature, mostly relating to the East Asian crisis, emphasizes the interplay and reinforcement between currency and banking crises, presumably making twin crises particularly damaging to the real economy. Using a panel data set over the 1975-97 period and covering 24 emerging-market economies, we find that twin crises do not contribute any additional (marginal) negative impact on output growth. That is, twin crises do not adversely impact output over and above the independent effects associated with a currency and banking crisis taken together. We find that currency (banking) crises are very damaging, reducing output by about 5-8 (8-10) percent over a two-four year period. The cumulative output loss of both types of crises occurring at the same time is therefore very large, around 13-18 percent, and should alarm policymakers. However, twin crises are "bad" only in that they entail output losses associated with both currency and banking crises, not because there are additional feedback or interactive effects further damaging the economy. This result is robust to alternative model specifications, lag structures and using IV and GMM estimation procedures that correct bias associated with simultaneity and estimation of dynamic panel models with country-specific effects.

JEL Classification: F43, G15, G21, O40

Suggested Citation

Hutchison, Michael M. and Noy, Ilan, How Bad are Twins? Output Costs of Currency and Banking Crises (January 2002). UCSC International Economics Working Paper No. 02-1. Available at SSRN: https://ssrn.com/abstract=304502 or http://dx.doi.org/10.2139/ssrn.304502

Michael M. Hutchison (Contact Author)

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)

Ilan Noy

Victoria University of Wellington

P.O. Box 600
Wellington, 6140
New Zealand

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