Strong contagion with weak spillovers
AbstractIn this paper, we develop an explanation for 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 escape dynamics in each market, and show that an escape in one market is contagious because it more than doubles the probability of a similar escape in another market. We claim that contagion is strong since escapes become highly synchronised 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.
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Bibliographic InfoPaper provided by University College London in its series Open Access publications from University College London with number http://discovery.ucl.ac.uk/3869/.
Date of creation: 01 Apr 2006
Date of revision:
Publication status: Published in Review of Economic Dynamics (2006-04-01) v.9, p.263-283
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Other versions of this item:
- Ellison, Martin & Graham, Liam & Vilmunen, Jouko, 2004. "Strong Contagion with Weak Spillovers," CEPR Discussion Papers 4762, C.E.P.R. Discussion Papers.
- Martin Ellison & Liam Graham & Jouko Vilmunen, 2005. "Strong contagion with weak spillovers," Computing in Economics and Finance 2005 30, Society for Computational Economics.
- 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.
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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