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The Logic of Twin Debt and Currency Crises
Credit and Capital Markets – Kredit und Kapital, Vol. 38 (2005), Iss. 1 : pp. 1–21
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Bernhard Herz, Bayreuth
References
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Abstract
While the well-known twin currency and banking crises has drawna lot of interest a second type of twin crises, the simultaneous occurrence of currency and debt crises, has so far been neglected in the literature. The decision of a government to devalue and/or to default is closely interlinked through the government’s intertemporal budget constraint and the market expectations. On the one hand, debt and currency crisis are negatively interlinked as a debt crisis eases the fiscal burden of the government thereby making a currency crisis less likely and vice versa. On the other hand, debt and currency crises are positively interlinked, as the expectation of a debt crisis can increase the fiscal burden by rising interest rates so that an additional currency crisis becomes more likely. (JEL F31, F33, F34, F41)