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Strong Contagion with Weak Spillovers

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Author Info
Martin Ellison (University of Warwick)
Liam Graham (University College London)
Jouko Vilmunen (Bank of Finland)

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Abstract

In this paper, we develop an explanation for why events in one market may trigger similar events in other markets, even though at first sight the markets appear to be only weakly related. We allow for escape dynamics in each market, and show that an escape in one market is contagious because it more than doubles the probability of a similar escape in another market. We claim that contagion is strong since escapes become highly synchronised across markets. Spillovers are weak because the instantaneous spillover of events from one market to another is small. To illustrate our result, we demonstrate how a currency crisis may be contagious with only weak links between countries. Other examples where weak spillovers would create strong contagion are various models of monetary policy, imperfect competition and endogenous growth. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.01.001
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 2 (April)
Pages: 263-283
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Handle: RePEc:red:issued:v:9:y:2006:i:2:p:263-283

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Related research
Keywords: Contagion; Escape dynamics; Learning; Spillovers;

Other versions of this item:

Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
F31 - International Economics - - International Finance - - - Foreign Exchange

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. In-Koo Cho & Kenneth Kasa, 2003. "Learning Dynamics and Endogenous Currency Crises," Computing in Economics and Finance 2003 132, Society for Computational Economics. [Downloadable!]
    Other versions:
  2. Robert J. Tetlow & Peter von zur Muehlen, 2002. "Avoiding Nash inflation: Bayesian and robust responses to model uncertainty," Finance and Economics Discussion Series 2002-9, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Noah Williams, 2003. "Small Noise Asymptotics for a Stochastic Growth Model," Computing in Economics and Finance 2003 262, Society for Computational Economics. [Downloadable!]
    Other versions:
  4. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The Conquest of South American Inflation," NBER Working Papers 12606, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August. [Downloadable!] (restricted)
  6. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2000. "A simple model of monetary policy and currency crises," European Economic Review, Elsevier, vol. 44(4-6), pages 728-738, May. [Downloadable!] (restricted)
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  7. Bullard, James & Cho, In-Koo, 2005. "Escapist policy rules," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1841-1865, November. [Downloadable!] (restricted)
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  8. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Bruce McGough, 2003. "Shocking Escapes," Computing in Economics and Finance 2003 294, Society for Computational Economics. [Downloadable!]
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  10. Kenneth Kasa, 2004. "Learning, Large Deviations, And Recurrent Currency Crises," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 141-173, 02. [Downloadable!] (restricted)
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  11. Cho, In-Koo & Williams, Noah & Sargent, Thomas J, 2002. "Escaping Nash Inflation," Review of Economic Studies, Blackwell Publishing, vol. 69(1), pages 1-40, January.
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  12. Andrea Gerali & Francesco Lippi, 2002. "On the 'conquest' of inflation," Temi di discussione (Economic working papers) 444, Bank of Italy, Economic Research Department. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The conquest of South American inflation," Working Paper 2006-20, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
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