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Interdependent Expectations and the Spread of Currency Crises

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  • Wolfram Berger

    (International Monetary Fund)

  • Helmut Wagner

    (International Monetary Fund)

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    Abstract

    In this paper we analyze how the mutual interdependence of private sector expectations influences the stability offixed exchange rate regimes in different countries. When countries trade with one another, the crisis probabilities are interdependent because monetary policy in each country affects welfare both at home and abroad. Wage setters react to a trading partner's imminent crisis, because a loss of international competitiveness changes their governments' optimal escape clauses. Thus, not only actual devaluations but an increasing crisis probability in one country may trigger currency crises elsewhere. We show that both fundamental weakness and spontaneous shifts in market sentiment may play a role in the transmission of currency crises.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

    Volume (Year): 52 (2005)
    Issue (Month): 1 (April)
    Pages: 41-54

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    Handle: RePEc:pal:imfstp:v:52:y:2005:i:1:p:41-54

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    Cited by:
    1. Paolo Canofari & Giancarlo Marini & Giovanni Piersanti, 2012. "The Sustainability of Monetary Unions. Can the Euro Survive?," CEIS Research Paper 226, Tor Vergata University, CEIS, revised 27 Mar 2012.
    2. Giancarlo Marini & Giovanni Piersanti, 2012. "Models of Speculative Attacks and Crashes in International Capital Markets," CEIS Research Paper 245, Tor Vergata University, CEIS, revised 24 Jul 2012.

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