Anatomy of a Twin Crisis

The author presents a model of a twin crisis, in which foreign and domestic residents play a banking game. Both "honest" and run equilibria of the post-deposit subgame exist; some run equilibria lead to a currency crisis, as agents convert domestic currency to foreign currency. In the subgame, sunspot variables can affect the equilibrium. The author calculates the unique equilibrium of the game numerically, taking into account the possible realizations of the sunspot variables. He also calibrates the model to the Turkish economy, providing insight into the Turkish twin crisis of 2001.