Debt and Currency Crises—Complements or Substitutes?*

Bernhard Herz and Hui Tong

Review of International Economics, 2008, vol. 16, issue 5, 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.

Date: 2008
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