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Relative Risk Aversion And The Transmission Of Financial Crises

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Author Info
Melisso Boschi ()
Aditya Goenka ()

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Abstract

We study how investor behaviour affects the transmission of ?financial crises. If investors exhibit decreasing relative risk aversion, then negative wealth shocks increase the risk premium required to hold risky assets. We integrate this into a second generation model of currency crises which allows for a competitiveness e¤ect and for contagion through changes in fundamentals. The investor behaviour can lead to the transmission of ?financial crises even in the absence of the competitiveness effect, and makes multiple equilibria more likely. The possible stabilization effects of capi- tal controls and a Tobin tax on the international transmission of ?financial crises are also studied.

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Paper provided by Australian National University, Centre for Applied Macroeconomic Analysis in its series CAMA Working Papers with number 2007-28.

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Length: 28 pages
Date of creation: Oct 2007
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Handle: RePEc:acb:camaaa:2007-28

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Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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    Other versions:
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  13. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June. [Downloadable!] (restricted)
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  15. Taimur Baig & Ilan Goldfajn, 2000. "The Russian default and the contagion to Brazil," Textos para discussão 420, Department of Economics PUC-Rio (Brazil). [Downloadable!]
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