probability of a sovereign debt crisis but tended to be largely unrelated to banking and currency crises. Larger FDI inflows, a more stable form of finance than portfolio inflows, were associated with a lower probability of a currency crisis.

Magnitude of crisis probabilities. In isolation, some of these probabilities appear small. This is expected since they are based on a sample in which crises are rare (less than 5 percent of observations) and they are associated with individual indicators. However, the probabilities could cumulate rapidly when multiple indicators deteriorate at the same time as has frequently happened prior to financial crises.

Twin crisis probabilities. The probability of the occurrence of twin crises (any two of sovereign debt, banking, and currency crises) is lower than single crisis events (in line with the less than 0.5 percent of the observations with twin or triple crises in the sample). A twin crisis is defined as the occurrence of any two of sovereign debt, banking, or currency crises within two consecutive years. However, the explanatory variables in the baseline model have better predictive ability in predicting a twin crisis one year ahead than in predicting a single crisis. An adverse GDP growth shock, a larger share of shortterm debt, higher debt service burden, lower reserve cover, and larger changes in government and private debt significantly increase the probability of a twin crisis, although the interaction term of government and private debt is insignificant. The estimation results are shown in Table 8.

# 3.3 Robustness tests

Several additional correlates were added to the baseline empirical specification to test the robustness of the results. The baseline results are robust to these alternative specifications. These results are provided in Tables 9 and 10.

First, the quality of institutions may affect the incidence of crises. However, data for meaningful cross-country and over-time comparison, such as the Worldwide Governance Indicators (WDI; Kaufmann, Kraay and Mastruzzi 2010), is only available starting in the early 1990s. As a result, most sovereign debt and banking crises as well as many currency crises, which mainly occurred during the 1970s-1980s, will be omitted from the estimation sample. Indeed, the use of WDI data reduces the number of observations by almost a half. Furthermore, most measures of institutional quality are insignificant, while the results on other variables are broadly of the same magnitude, signs and significance as in the baseline specification. Several statistically significant results are counterintuitive and may reflect other omitted factors.

Second, to account for possible nonlinearity of the impact of debt increases on the probability of crises and its dependence on the level of debt, baseline regressions were augmented with squared changes in debt and interactions between a change in debt and the initial level of debt. In most specifications, these new variables are not statistically significant, while other coefficients remain consistent with the findings of the baseline model.

Third, the foreign exchange regime or a shift in foreign currency regime influence the probability of financial distress but in different ways for different types of crises. An EMDE with a fixed exchange rate is more likely to suffer a sovereign debt crisis, while a shift to a flexible exchange rate increases the likelihood of a banking crisis. A currency 13