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American Economic Review Vol. 89 No. 3 1999

The Twin Crises: The Causes of Banking and Balance-of-Payments Problems

Graciela L. Kaminsky1; Carmen Reinhart2

1 Department of Economics, George Washington University, Washington, DC 20052. · 2 School of Public Affairs and Department of Economics, University of Maryland, College Park, MD 20742, and the National Bureau of Economic Research.

Abstract

In the wake of the Mexican and Asian currency turmoil, the subject of financial crises has come to the forefront of academic and policy discussions. This paper analyzes the links between banking and currency crises. We find that: problems in the banking sector typically precede a currency crisis—the currency crisis deepens the banking crisis, activating a vicious spiral; financial liberalization often precedes banking crises. The anatomy of these episodes suggests that crises occur as the economy enters a recession, following a prolonged boom in economic activity that was fueled by credit, capital inflows, and accompanied by an overvalued currency.

DOI
10.1257/aer.89.3.473
Volume
89
Issue
3
Pages
473-500
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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