Informational Contagion of Sudden Stops in a Global Games Framework
AbstractThis paper highlights the cross-country spread of self-fulfilling financial crises through an informational channel. It sets up a two-country framework of investment with strategic complementarities and incomplete information about economic fundamentals. Each market may be subject to sudden stops, triggered by agents preemptively withdrawing their investments for fear others do so. After observing a massive capital outflow from one country, agents downgrade common fundamentals, and therefore have higher requirements regarding factors specific to the other country. This in turn may induce a crisis in the latter, which is not justified by idiosyncratic events or economic interdependence.
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Bibliographic InfoArticle provided by Springer in its journal Open Economies Review.
Volume (Year): 15 (2004)
Issue (Month): 2 (04)
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Web page: http://www.springerlink.com/link.asp?id=100323
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- Tai-kuang Ho & Ming-yen Wu, 2012. "Third-person Effect and Financial Contagion in the Context of a Global Game," Open Economies Review, Springer, vol. 23(5), pages 823-846, November.
- Manz, Michael, 2010. "Information-based contagion and the implications for financial fragility," European Economic Review, Elsevier, vol. 54(7), pages 900-910, October.
- Vaugirard, Victor, 2007. "Informational contagion of bank runs in a third-generation crisis model," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 403-429, April.
- Victor Vaugirard, 2005. "Crony Capitalism and Sovereign Default," Open Economies Review, Springer, vol. 16(1), pages 77-99, January.
- Victor Vaugirard, 2004. "Bank runs, political distortions and contagion," Economics Bulletin, AccessEcon, vol. 6(18), pages 1-10.
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