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Spreading Currency Crises

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  • Wolfram Berger
  • Helmut Wagner

Abstract

We analyze in this paper how the mutual dependence of private sector expectations in different countries on one another influences the stability of fixed exchange rate regimes. The crisis probabilities of countries trading with one another are interdependent because wage setters react to an imminent loss of international competitiveness stemming from an increase in the crisis probability of a trading partner. If a currency crisis in one country is perceived to be increasingly likely, the probability of devaluation of its trading partners’ currencies to restore their international competitiveness rises as well. Thus, not only actual devaluations but also an increasing crisis probability may trigger currency crises elsewhere. We show that not only fundamental weaknesses but also spontaneous shifts in market sentiment may play a role in precipitating currency crises.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/144.

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Length: 20
Date of creation: 01 Aug 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/144

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Cited by:
  1. Louise Allsopp, 2003. "Speculative behaviour, debt default and contagion: A stylised framework of the Latin American Crisis 2001-2002," Reserve Bank of New Zealand Discussion Paper Series DP2003/10, Reserve Bank of New Zealand.
  2. Helmut Wagner & Wolfram Berger, 2004. "Globalization, Financial Volatility and Monetary Policy," Economic Change and Restructuring, Springer, vol. 31(2), pages 163-184, June.
  3. Helmut Wagner & Wolfram Berger, 2003. "Financial Globalization and Monetary Policy," DNB Staff Reports (discontinued) 95, Netherlands Central Bank.

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