Optima exchange crisis regression and twin crisis: Evidences for some MENA countries

In the wake of the recent currency turmoil, the determinants of financial crises have come to the forefront of academic and policy debates. Applied to the MENA region, the objective of this article is to estimate the likely impact of the dynamics of liberalization on the financial stability. The theoretical context is linked with the debate on the optimal sequence of liberalization. The economic intuition behind this analysis relies on the fact that the dynamics of liberalization matters more than the sequence of liberalization. It means that the effect “financial instability” of the process of liberalization appeared only during the process of financial liberalization. We provide empirical evidence from a sample of 9 MENA countries over the period 1980 to 2011. From a methodological point of view, we use the panel threshold regressions. The threshold regressions support the interrelationship between the banking and currency crises. The structural changes are estimated using the econometric procedure elaborated by Hansen (1999). The results suggest that the dynamics of liberal reforms may constitute a determinant of financial stability. More precisely, our estimations show that an increase in domestic credits significantly stimulates speculative pressures. This empirical evidence supports the twin crisis argument proposed by Kaminsky and Reinhart (1999) which suggests a high correlation between currency and banking crises. The dynamics of liberalization plays a key role in explaining why currency and banking crises are so closely entwined. Finally, as a contribution to Edwards (2009), this note advocates the preeminence of threshold models relatively to classical linear models in sizing the effects of financial liberalization on speculative pressures.