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Contagion and Trade: Why Are Currency Crises Regional?

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  • Reuven Glick
  • Andrew K. Rose

Abstract

Currency crises tend to be regional; they affect countries in geographic proximity. This suggests that patterns of international trade are important in understanding how currency crises spread, above and beyond any macroeconomic phenomena. We provide empirical support for this hypothesis. Using data for five different currency crises (in 1971, 1973, 1992, 1994, and 1997) we show that currency crises affect clusters of countries tied together by international trade. By way of contrast, macroeconomic and financial influences are not closely associated with the cross-country incidence of speculative attacks. We also show that trade linkages help explain cross-country correlations in exchange market pressure during crisis episodes, even after controlling for macroeconomic factors.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6806.

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Date of creation: Nov 1998
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Publication status: published as Journal of International Money and Finance, Vol. 18, no. 4 (August 1999): 603-617
Handle: RePEc:nbr:nberwo:6806

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  1. Leamer, E. & Levingsohn, J., 1994. "International Trade Theory: The Evidence," Working Papers, Research Seminar in International Economics, University of Michigan 368, Research Seminar in International Economics, University of Michigan.
  2. Kasa, Kenneth & Huh, Chan, 2001. "A Dynamic Model of Export Competition, Policy Coordination, and Simultaneous Currency Collapse," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 9(1), pages 68-80, February.
  3. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 98(4), pages 463-84, December.
  4. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Contagious Currency Crises," NBER Working Papers 5681, National Bureau of Economic Research, Inc.
  5. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper tigers? A model of the Asian crisis," Research Paper, Federal Reserve Bank of New York 9822, Federal Reserve Bank of New York.
  6. Gerlach, Stefan & Smets, Frank, 1994. "Contagious Speculative Attacks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1055, C.E.P.R. Discussion Papers.
  7. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Vald├ęs, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
  8. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  9. Grubel, Herbert G & Lloyd, P J, 1971. "The Empirical Measurement of Intra- Industry Trade," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 47(120), pages 494-517, December.
  10. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers, Banca Italia - Servizio di Studi 343, Banca Italia - Servizio di Studi.
  11. Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
  12. Maurice Obstfeld, 1984. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
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