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Is there a causal link between currency and debt crises?

Author

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  • Axel Dreher

    (ETH-Swiss Federal Institute of Technology Zurich, KOF, ETH Zentrum WEH, 8092 Zurich, Switzerland)

  • Bernhard Herz

    (University of Bayreuth, Universitätsstrasse 30, 95447 Bayreuth, Germany)

  • Volker Karb

    (University of Bayreuth, Universitätsstrasse 30, 95447 Bayreuth, Germany)

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 common causes, contagion effects from one crisis to the other, and complementary budget financing aspects. In an empirical analysis based on a panel of 80 countries over the period 1975-2000, we first investigate the determinants of each crisis separately. Then 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, currency crises significantly increase the risk of contemporaneous debt crises and vice versa. Copyright © 2006 John Wiley & Sons, Ltd.

Suggested Citation

  • Axel Dreher & Bernhard Herz & Volker Karb, 2006. "Is there a causal link between currency and debt crises?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(4), pages 305-325.
    • Handle: RePEc:ijf:ijfiec:v:11:y:2006:i:4:p:305-325
    DOI: 10.1002/ijfe.300
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    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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