This paper, authored by Graciela L. Kaminsky and Carmen M. Reinhart, examines the potential links between banking and balance-of-payments (BOP) crises, focusing on a large number of countries. The authors find that knowing about banking problems helps predict BOP crises, but the reverse is not true. Financial liberalization often precedes banking crises and helps predict them. The paper suggests that rather than a causal relationship from banking to BOP crises, common macroeconomic factors likely drive both types of crises. The analysis covers the period from the 1970s to the mid-1990s, including both industrial and developing countries. The study constructs indices of banking and BOP crises and examines the behavior of various macroeconomic indicators around these events. Key findings include: 1. **Causal Patterns**: Banking crises are more likely to predict BOP crises, but BOP crises do not predict banking crises. 2. **Financial Liberalization**: Financial liberalization is a significant factor in predicting banking crises but not BOP crises. 3. **Macroeconomic Background**: Both crises are preceded by recessions, economic activity decline, and high real interest rates. BOP crises are often accompanied by falling foreign exchange reserves, accelerating money growth, and increased liabilities of the banking system. 4. **External Shocks**: Terms of trade declines and external shocks play a significant role in both crises. The paper concludes that while the exact causal mechanisms remain unclear, the common macroeconomic factors suggest that understanding these factors is crucial for predicting and managing both types of crises.This paper, authored by Graciela L. Kaminsky and Carmen M. Reinhart, examines the potential links between banking and balance-of-payments (BOP) crises, focusing on a large number of countries. The authors find that knowing about banking problems helps predict BOP crises, but the reverse is not true. Financial liberalization often precedes banking crises and helps predict them. The paper suggests that rather than a causal relationship from banking to BOP crises, common macroeconomic factors likely drive both types of crises. The analysis covers the period from the 1970s to the mid-1990s, including both industrial and developing countries. The study constructs indices of banking and BOP crises and examines the behavior of various macroeconomic indicators around these events. Key findings include: 1. **Causal Patterns**: Banking crises are more likely to predict BOP crises, but BOP crises do not predict banking crises. 2. **Financial Liberalization**: Financial liberalization is a significant factor in predicting banking crises but not BOP crises. 3. **Macroeconomic Background**: Both crises are preceded by recessions, economic activity decline, and high real interest rates. BOP crises are often accompanied by falling foreign exchange reserves, accelerating money growth, and increased liabilities of the banking system. 4. **External Shocks**: Terms of trade declines and external shocks play a significant role in both crises. The paper concludes that while the exact causal mechanisms remain unclear, the common macroeconomic factors suggest that understanding these factors is crucial for predicting and managing both types of crises.