Regionality revisited: An examination of the direction of spread of currency crises
AbstractWhat determines the direction of spread of currency crises? We examine data on waves of currency crises in 1992, 1994, 1997, and 1998 to evaluate several hypotheses on the determinants of contagion. We simultaneously consider trade competition, financial links, and institutional similarity to the "ground zero" country as potential drivers of contagion. To overcome data limitations and account for model uncertainty, we utilize Bayesian methodologies hitherto unused in the empirical literature on contagion. In particular, we use the Bayesian averaging of binary models that allows us to take into account the uncertainty regarding the appropriate set of regressors. We find that institutional similarity to the ground zero country plays an important role in determining the direction of contagion in all the emerging market currency crises in our dataset. We thus provide persuasive evidence in favour of the "wake-up call" hypothesis for financial contagion. Trade and financial links may also play a role in determining the direction of contagion, but their importance varies amongst the crisis periods.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 30 (2011)
Issue (Month): 5 (September)
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Web page: http://www.elsevier.com/locate/inca/30443
Financial contagion Exchange rate Institutions Bayesian model averaging;
Other versions of this item:
- Anja Shortland & Roberto Leon-Gonzalez & Amil Dasgupta, 2006. "Regionality Revisited: An Examination of the Direction of Spread of Currency Crises," FMG Discussion Papers dp584, Financial Markets Group.
- Amil Dasgupta & Roberto Leon-Gonzalez & Anja Shortland, 2010. "Regionality Revisited: An Examination of the Direction of Spread of Currency Crisis," Discussion Papers of DIW Berlin 1023, DIW Berlin, German Institute for Economic Research.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
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