Strong Contagion with Weak Spillovers
AbstractIn this Paper, we develop a model which explains 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 multiple equilibria and learning dynamics in each market, and show that a jump between equilibria in one market is contagious because it more than doubles the probability of a similar jump in another market. We claim that contagion is strong since equilibrium jumps become highly synchronized 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.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4762.
Date of creation: Nov 2004
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Other versions of this item:
- Martin Ellison & Liam Graham & Jouka Vilmunen, 2005. "Strong Contagion with Weak Spillovers," Money Macro and Finance (MMF) Research Group Conference 2005 91, Money Macro and Finance Research Group.
- Martin Ellison & Liam Graham & Jouko Vilmunen, 2005. "Strong contagion with weak spillovers," Computing in Economics and Finance 2005 30, Society for Computational Economics.
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
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