Political Contagion in Currency Crises
AbstractExisting 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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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7211.
Date of creation: Jul 1999
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Publication status: published as Allan Drazen. "Political Contagion in Currency Crises," in Paul Krugman, editor, "Currency Crises" University of Chicago Press (2000)
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Other versions of this item:
- F30 - International Economics - - International Finance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-07-28 (All new papers)
- NEP-CDM-1999-07-28 (Collective Decision-Making)
- NEP-IFN-1999-07-28 (International Finance)
- NEP-PKE-1999-07-28 (Post Keynesian Economics)
- NEP-POL-1999-07-28 (Positive Political Economics)
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