Debt and Currency Crises-Complements or Substitutes?

Bernhard Herz () and Hui Tong ()

Review of International Economics, 2008, vol. 16, issue 5, pages 955-970

Abstract: Debt and currency crises are closely interlinked through the government's intertemporal budget constraint. The default tax and the inflation/devaluation tax can be considered as alternative means of financing. Our empirical analysis finds that high-debt countries choose default rather than inflation/devaluation for financing, while a high money stock reduces the probability of debt crises. Further, we find strong evidence that debt and currency crises share common fundamental causes. Finally, there is a Granger causality running from debt crises to currency crises, but only weakly in the other direction. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd.

Date: 2008

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