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

by Graciela L. Kaminsky of George Washington University, and
Carmen M. Reinhart of the University of Maryland

June 1999

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.

JEL Classification: F30, F41.

Published in: American Economic Review, Vol. 89, No. 3, (June 1999), pp. 473-500.

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