Global Finance in Emerging Market Economies by Knoop Todd;

Author:Knoop, Todd;
Language: eng
Format: epub
Publisher: Taylor & Francis Group

Figure 8.3 The potential stages of financial crisis.

A few studies have attempted to estimate the costs of twin crises. Bordo et al. (2001) estimate that the cumulative output cost of a twin crisis is 16 percent of GDP over and above the cost of an average recession, making twin crises very costly. Of this amount, 4.4 percent of the lost GDP is caused by the banking crisis and 8.7 percent is caused by the currency crisis, leaving the incremental lost GDP that is attributable to the interaction between the crises at approximately 3 percent of GDP.4 Focusing only on emerging market economies, Hutchison and Noy (2005) find similar results that twin crises lead to reductions in output of between 13 and 18 percent of GDP. However, they fail to find any evidence that twin crises have costs that are greater than currency and banking crises separately. Hutchison and Noy also differ from Bordo et al. in that they find that banking crises are more costly than currency crises. Their estimates are that currency crises reduce GDP by between 5 and 8 percent over a two-to-four-year period, while banking crises reduce GDP by between 8 and 10 percent of GDP.5 Thus, questions as to whether currency crises or banking crises are the most costly, and about the costs of interactions between the two, still remain unanswered empirically.

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