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Political Contagion in Currency Crises

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Author Info
Allan Drazen

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Abstract

Existing models of contagious currency crises are summarized and surveyed, and it is argued that more weight should be put on political factors. Towards this end, the concept of political contagion introduced, whereby contagion in speculative attacks across currencies arises solely because of political objectives of countries. A specific model of membership' contagion is presented. The desire to be part of a political-economic union, where maintaining a fixed exchange rate is a condition for membership and where the value of membership depends positively on who else is a member, is shown to give rise to potential contagion. We then present evidence suggesting that political contagion may have been important in the 1992-3 EMS crisis.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7211.

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Date of creation: Jul 1999
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Handle: RePEc:nbr:nberwo:7211

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F30 - International Economics - - International Finance - - - General

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References listed on IDEAS
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  1. Martin Feldstein, 1998. "The Political Economy of the European Economic and Monetary Union: Political Sources of an Economic Liability," NBER Working Papers 6150, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August. [Downloadable!] (restricted)
  3. Ozkan, F Gulcin & Sutherland, Alan, 1995. "Policy Measures to Avoid a Currency Crisis," Economic Journal, Royal Economic Society, vol. 105(429), pages 510-19, March. [Downloadable!] (restricted)
  4. Masson, Paul R, 1995. "Gaining and Losing ERM Credibility: The Case of the United Kingdom," Economic Journal, Royal Economic Society, vol. 105(430), pages 571-82, May. [Downloadable!] (restricted)
  5. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March. [Downloadable!] (restricted)
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  6. Bartolini, Leonardo & Drazen, Allan, 1997. "Capital-Account Liberalization as a Signal," American Economic Review, American Economic Association, vol. 87(1), pages 138-54, March. [Downloadable!] (restricted)
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  7. Bensaid, Bernard & Jeanne, Olivier, 1997. "The instability of fixed exchange rate systems when raising the nominal interest rate is costly," European Economic Review, Elsevier, vol. 41(8), pages 1461-1478, August. [Downloadable!] (restricted)
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  8. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
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  9. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October. [Downloadable!] (restricted)
  10. Paul R. Masson & Allan Drazen, 1994. "Credibility of Policies Versus Credibility of Policymakers," IMF Working Papers 94/49, International Monetary Fund.
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  11. Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1993-1), pages 51-144. [Downloadable!]
  12. Drazen, Allan & Helpman, Elhanan, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 835-55, November. [Downloadable!] (restricted)
  13. Gerlach, Stefan & Smets, Frank, 1995. "Contagious speculative attacks," European Journal of Political Economy, Elsevier, vol. 11(1), pages 45-63, March. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Gerardo Esquivel & Felipe B. Larrain, 2000. "Currency Crises: Is Central America Different?," Econometric Society World Congress 2000 Contributed Papers 0566, Econometric Society. [Downloadable!]
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  2. Michael Bleaney & Marco Gundermann, 2002. "Stabilisations, Crises and the "Exit" Problem - A Theoretical Model," Macroeconomics 0207003, EconWPA. [Downloadable!]
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  3. Michael Berlemann & Kalin Hristov & Nikolay Nenovsky, 2002. "Lending of Last Resort, Moral Hazard and Twin Crises: Lessons from the Bulgarian Financial Crisis 1996/1997," William Davidson Institute Working Papers Series 464, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  4. Martínez, Juan & Santiso, Javier, 2003. "Financial Markets and Politics: The Confidence Game in Latin American Emerging Economies," MPRA Paper 12909, University Library of Munich, Germany. [Downloadable!]
  5. Giancarol Corsetti & Paolo Pesenti & Nouriel Roubini & Cedric Tille, 1999. "Competitive devaluations: a welfare-based approach," Staff Reports 58, Federal Reserve Bank of New York. [Downloadable!]
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  6. Giorgio Fazio & Tamim Bayoumi & Manmohan S. Kumar & Ronald MacDonald, 2003. "Fatal Attraction: A New Measure of Contagion," IMF Working Papers 03/80, International Monetary Fund. [Downloadable!]
  7. Francisco Ledesma-Rodríguez & Jorge Pérez-Rodríguez & Simón Sosvilla-Rivero, 2006. "An empirical examination of exchange-rate credibility determinants in the EMS," Applied Economics Letters, Taylor and Francis Journals, vol. 13(13), pages 847-850, October. [Downloadable!] (restricted)
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  8. Galina Hale, 2005. "Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Roll–over," The Institute for International Integration Studies Discussion Paper Series iiisdp062, IIIS. [Downloadable!]
    Other versions:
  9. Kirsten Wandschneider, 2005. "The Stability of the Inter-war Gold Exchange Standard. Did Politics Matter?," Middlebury College Working Paper Series 0518, Middlebury College, Department of Economics. [Downloadable!]
    Other versions:
  10. Mohamed Ben Abdallah & Iuliana Matei, 2005. "Crise et contagion : cas des pays de l'Europe de l'Est," Cahiers de la Maison des Sciences Economiques bla05044, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
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  11. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Bayoumi, Tamim & Fazio, Giorgio & Kumar, Manmohan & MacDonald, Ronald, 2003. "Fatal Attraction," CEPR Discussion Papers 3870, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Ling Hu, 2006. "Dependence patterns across financial markets: a mixed copula approach," Applied Financial Economics, Taylor and Francis Journals, vol. 16(10), pages 717-729, June. [Downloadable!] (restricted)
  14. Kam-hon CHU & Bob Y. C. Chan & Chor-yiu Sin, 2000. "Contagion Effects, Informational Effects, and Economic Fundamentals: An Analysis of Exchange Rate Dynamics during the Asian Currency Crisis," Working Papers 022000, Hong Kong Institute for Monetary Research. [Downloadable!]
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