Asset Prices and Twin Crises

Rajesh Singh ()

Staff General Research Papers from Iowa State University, Department of Economics

Abstract: Recent emerging market crises have been characterized by two key features: (i) banking crises generally precede currency crises, and (ii) asset prices decline in advance of currency crises. This paper argues that asset prices provide a key link between banking and currency crises. It is shown that a prospective currency crisis due to an unanticipated increase in the public debt triggers an asset price decline. Banks' exposure to asset prices in turn deteriorates their balance sheets and precipitates a banking crisis. Under the assumption of government bailout of banks, it is shown that the `twin' crises are self-fulfilling and their time-line follows (i) and (ii) described above. The timing of currency crisis is decreasing in the ratio of government's bailout to banks' loss of capital.

Keywords: twin crises; currency crises; banking crises; government bailout. (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2007-09-29

Forthcoming in Journal of International Money and Finance

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Persistent link: http://EconPapers.repec.org/RePEc:isu:genres:12844

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