The Twin Crises: The Causes of Banking and Balance-of-Payments Problems
Graciela L. Kaminsky, Carmen M. Reinhart
American Economic Review · 1999 · Volume 89 · Issue 3
Abstract
In the wake of the Mexican and Asian currency turmoil, the subject of financial crises have come to the forefront of academic and policy discussions. This paper analyzes the links between banking and currency crises. The authors 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.
Keywords
Current Account Adjustment, Short-term Capital Movements, Banks, Other Depository Institutions, Micro Finance Institutions, Mortgages, International Lending and Debt Problems, Economic Development: Financial Markets, Saving and Capital Investment, Corporate Finance and Governance, International Linkages to Development, Role of International Organizations
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