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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4762.
Date of creation: Nov 2004
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
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
This paper has been announced in the following NEP Reports:
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.:
- Noah Williams, 2003.
"Small Noise Asymptotics for a Stochastic Growth Model,"
Computing in Economics and Finance 2003
262, Society for Computational Economics.
- Williams, Noah, 2004. "Small noise asymptotics for a stochastic growth model," Journal of Economic Theory, Elsevier, vol. 119(2), pages 271-298, December.
- Noah Williams, 2003. "Small Noise Asymptotics for a Stochastic Growth Model," NBER Working Papers 10194, National Bureau of Economic Research, Inc.
- Thomas Sargent & Noah Williams & Tao Zha, 2009.
"The Conquest of South American Inflation,"
Journal of Political Economy,
University of Chicago Press, vol. 117(2), pages 211-256, 04.
- Thomas Sargent & Noah Williams & Tao Zha, 2006. "The conquest of South American inflation," Working Paper 2006-20, Federal Reserve Bank of Atlanta.
- Thomas Sargent & Noah Williams & Tao Zha, 2006. "The Conquest of South American Inflation," NBER Working Papers 12606, National Bureau of Economic Research, Inc.
- 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.).
- Robert Tetlow & Peter von zur Muehlen, 2004. "Avoiding Nash Inflation: Bayesian and Robus Responses to Model Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 869-899, October.
- 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.
- Kenneth Kasa, 2000. "Learning, large deviations, and recurrent currency crises," Working Paper Series 2000-10, Federal Reserve Bank of San Francisco.
- Andrea Gerali & Francesco Lippi, 2002.
"On the 'conquest' of inflation,"
Temi di discussione (Economic working papers)
444, Bank of Italy, Economic Research and International Relations Area.
- James Bullard & In-Koo Cho, 2003.
"Escapist policy rules,"
2002-002, Federal Reserve Bank of St. Louis.
- Cho, In-Koo & Williams, Noah & Sargent, Thomas J, 2002.
"Escaping Nash Inflation,"
Review of Economic Studies,
Wiley Blackwell, vol. 69(1), pages 1-40, January.
- Philippe AGHION & Philippe BACCHETTA & Abhijit BANERJEE, 1999.
"A Simple Model of Monetary Policy and Currency Crises,"
Cahiers de Recherches Economiques du DÃ©partement d'EconomÃ©trie et d'Economie politique (DEEP)
9914, Université de Lausanne, Faculté des HEC, DEEP.
- 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.
- Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1999. "A Simple Model of Monetary Pollicy and Currency Crises," Working Papers 99.05, Swiss National Bank, Study Center Gerzensee.
- Cho, In-Koo & Kasa, Kenneth, 2008.
"Learning Dynamics And Endogenous Currency Crises,"
Cambridge University Press, vol. 12(02), pages 257-285, April.
- Bruce McGough, 2003.
Computing in Economics and Finance 2003
294, Society for Computational Economics.
- Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August.
- William Poole, 2002. "Flation," Speech 49, Federal Reserve Bank of St. Louis.
- 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.
- Thomas Sargent & Noah Williams & Tao Zha, 2006.
"The conquest of South American inflation,"
2006-20, Federal Reserve Bank of Atlanta.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.