Banking and currency crises: how common are twins?

The coincidence of 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 analyze 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 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 old, 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 liberalized financial structure, make them particularly vulnerable to twin crises.Financial crises ; Money ; Bank failures

Currency crises

A currency crisis is a speculative attack on the foreign exchange value of a currency, resulting in a sharp depreciation or forcing the authorities to sell foreign exchange reserves and raise domestic interest rates to defend the currency. This article discusses analytical models of the causes of currency and associated crises, presents basic measures of the incidence of crises, evaluates the accuracy of empirical models in predicting crises, and reviews work measuring the consequences of crises on the real economy. Currency crises have large measurable costs on the economy, but our ability to predict the timing and magnitude of crises is limited by our theoretical understanding of the complex interactions between macroeconomic fundamentals, investor expectations and government policy.Capital movements ; Foreign exchange

A single market for Europe?

Europe 1992 ; European Economic Community

Monetary policy in the Pacific Basin

Pacific Area ; Monetary policy - Pacific Basin

Stopping "Hot Money" or Signaling Bad Policy? Capital Controls and the Onset of Currency Crises.

Restrictions on international capital transactions and other payments are usually designed to limit volatile short-term capital flows (“hot money”) and stabilize the exchange rate. Their imposition, however, may have the opposite effect by inadvertently signaling the continuation of macroeconomic imbalances and inconsistent (“bad”) future policy (Bartolini and Drazen, 1997a,b). This paper investigates these alternative hypotheses by testing the impact of restrictions on international capital flows and other payments controls on the likelihood of currency crises. We employ a comprehensive sample of 90 developing and emerging-market economies over the 1975-1997 period, identifying 160 currency crises. Restrictions on international capital flows, current accounts, and international payments are associated with a higher probability of the onset of a speculative attack on the currency. This finding is robust to alternative measures of liberalization on international payments and the exchange rate regime, controlling for macroeconomic determinants of currency instability, and taking into account instability emanating from the banking sector. There may be some individual exceptions but the weight of the evidence suggests that countries imposing capital restrictions are sending a “bad signal” to markets, in turn increasing the likelihood of a net capital outflow and a currency crisis.

Exchange rates and monetary policy

Foreign exchange rates ; Monetary policy ; Econometric models

The dollar and manufacturing output

Dollar, American ; Exports ; Manufactures ; Foreign exchange

Budget rules and monetary union in Europe

European Monetary System (Organization) ; Europe ; Fiscal policy ; Foreign exchange - Law and legislation

The European currency crisis

Foreign exchange rates ; Europe ; European Monetary System (Organization) ; Financial crises - Europe ; Financial crises - Germany ; Germany

Economic integration and fiscal policy transmission: implications for Europe in 1992 and beyond

European Economic Community ; Fiscal policy ; Capital movements