Is There a Causal Link between Currency and Debt Crises?

40 Pages Posted: 12 Apr 2004

See all articles by Axel Dreher

Axel Dreher

Heidelberg University

Bernhard Herz

University of Bayreuth

Volker Karb

University of Bayreuth

Date Written: February 2005

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 (1) common causes, (2) internal contagion effects from one crisis to the other, and (3) complementary budget financing aspects. The relationship between currency and debt crises is illustrated with a small theoretical model. Using panel data for 80 countries over the period 1975-2000, we analyze the relationship between currency and debt crises empirically in two steps. First, we investigate the determinants of each crisis separately. Second, 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, the occurrence of a currency crisis significantly increases the risk of a contemporaneous debt crisis and vice versa. Both types of crises are significantly more likely if the debt burden is higher.

Keywords: Debt crises, currency crises, contagion

JEL Classification: F34, F41, E61

Suggested Citation

Dreher, Axel and Herz, Bernhard and Karb, Volker, Is There a Causal Link between Currency and Debt Crises? (February 2005). Available at SSRN: https://ssrn.com/abstract=528063 or http://dx.doi.org/10.2139/ssrn.528063

Axel Dreher (Contact Author)

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

HOME PAGE: http://www.axel-dreher.de

Bernhard Herz

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Volker Karb

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

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