The Estimation of the Probability of the Twin Crisis Occurrence

Abstract

This paper calculates the probability of the twin crisis by empirical analysis with models of Logit and Probit. It selects some countries where twin crisis occurred in 1997 as samples, and forecasts within the samples. Then, it selects some countries where twin crisis occurred in 2008, and tests from outside samples. Results show that the model was well fitted and of high accuracy. The empirical results show that when economy growing too fast, a country should prevent the formation of the bubble economy; the excessive expansion of domestic credit will create bubble economy; variables of banking crisis tend to be as simultaneous or warning indicators for the occurrence of currency crisis. Structure of foreign debt must be suitable and the scale of foreign exchange reserves must be moderate. Key words: Banking crisis; Currency crisis; Twin crisis; Probability measurement