Factors triggering currency and banking crises, An empirical study of Latin America during 1990-2010

Sammanfattning: This paper examines factors that triggered widespread currency and banking crises in Latin America during 1990-2010 by looking at specific macroeconomic and financial variables. The paper aim to contribute to the vast literature of financial crises by distinguishing itself in three ways. First, the paper implements a dynamic binary choice panel data model with fixed effects. The binary choice model utilizes a maximum likelihood estimator with bias corrections to account for incidental parameter bias. To the best of my knowledge, such an estimation approach has never been implemented for data on financial crises. Second, the paper looks at the simultaneous relationship between explanatory variables and financial crises instead of trying to forecast financial crises which is the more common approach. Third, the paper analyzes the impact on both currency and banking crises instead of looking at determinants of these crises individually or by looking at currency and banking crises as intertwined. The results indicate that a change in exchange rate have a positive effect on the likelihood of currency and banking crises. The results are in line with previous research on currency crises, implying that the model is more suited for analyzing currency crises compared to banking crises.