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Asset Prices and Twin Crises

Author

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  • Singh, Rajesh
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.

Suggested Citation

  • Singh, Rajesh, 2007. "Asset Prices and Twin Crises," Staff General Research Papers Archive 12844, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:12844
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    Cited by:

    1. Cheng, Jin & Dai, Meixing & Dufourt, Frédéric, 2017. "Banking and sovereign debt crises in a monetary union without central bank intervention," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 142-151.

    More about this item

    Keywords

    twin crises; currency crises; banking crises; government bailout;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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