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American Economic Review: Vol. 89 No. 3 (June 1999)

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

Article Citation

Kaminsky, Graciela L., and Carmen M. Reinhart. 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems." American Economic Review, 89(3): 473-500.

DOI: 10.1257/aer.89.3.473

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.

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Authors

Kaminsky, Graciela L. (George Washington U)
Reinhart, Carmen M. (U MD and NBER)

JEL Classifications

F32: Current Account Adjustment; Short-term Capital Movements
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
F34: International Lending and Debt Problems
O16: Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
O19: International Linkages to Development; Role of International Organizations


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