Beyond the typical twin crises: an examination of banking and sovereign debt crises

Abstract: This paper examines potential determinants of banking and sovereign debt crises for the period 1970-2008 using a multivariate logit model. In addition, the paper analyzes links between these types of crises through conditional and unconditional probabilities. The empirical results for banking crises suggest that higher inflation and real interest rates increase the likelihood of a banking crisis, whereas domestic credit growth and real GDP growth appear insignificant. It is also found that a high ratio of long-term external debt to GDP typically precedes debt crises, but real GDP growth and inflation appear insignificantly related to the probability of a debt crisis. Concerning the links, the results indicate that a banking crisis increases the likelihood of a debt crisis. However, for banking crises, little valuable information is gained when the occurrence of a debt crisis is used as the conditioning piece of information. The fact that quite few twin crises are found suggests that this phenomenon is relatively uncommon.