Asset prices and twin crises

Rajesh Singh

Journal of International Money and Finance, 2009, vol. 28, issue 1, 26-55

Abstract: 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; Asset; prices; Government; bailout (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:28:y:2009:i:1:p:26-55

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