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Debt and Currency Crises—Complements or Substitutes? *
Author(s) -
Herz Bernhard,
Tong Hui
Publication year - 2008
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2008.00760.x
Subject(s) - economics , devaluation , monetary economics , currency , internal debt , debt , debt to gdp ratio , external debt , constraint (computer aided design) , government debt , macroeconomics , mechanical engineering , engineering
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.