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Speculative behaviour, debt default and contagion: A stylised framework of the Latin American Crisis 2001-2002

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Author Info
Louise Allsopp (Reserve Bank of New Zealand)
Abstract

This paper provides a model incorporating strategic speculative behaviour into a framework of debt default and contagion. A basic model of contagion shows how economies which appear fundamentally sound, can fail to meet foreign obligations when there are inter-linkages with a defaulting country. Introducing speculators into the framework increases the incidence of debt default and contagion. However, when these speculators view the economy with a degree of uncertainty, the likelihood of default and contagion is even greater. Speculators' perceptions over the state of the economy are therefore paramount when estimating the impact of a crisis on a region.

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File URL: http://www.rbnz.govt.nz/research/discusspapers/dp03_10.pdf
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2003/10.

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Length: 35p.
Date of creation: Dec 2003
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Handle: RePEc:nzb:nzbdps:2003/10

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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    Other versions:
  2. Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August. [Downloadable!] (restricted)
  3. Alessandro Prati & Massimo Sbracia, 2002. "Currency crises and uncertainty about fundamentals," Temi di discussione (Economic working papers) 446, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  4. Franklin Allen & Douglas Gale, 1998. "Financial Contagion Journal of Political Economy," Center for Financial Institutions Working Papers 98-31, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  5. Fiess, Norbert, 2003. "Capital flows, country risk, and contagion," Policy Research Working Paper Series 2943, The World Bank. [Downloadable!]
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    Other versions:
  7. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)
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  8. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June. [Downloadable!] (restricted)
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  9. Wolfram Berger & Helmut Wagner, 2002. "Spreading Currency Crises: The Role of Economic Interdependence," IMF Working Papers 02/144, International Monetary Fund.
  10. Martin Summer & Helmut Elsinger & Alfred Lehar, 2002. "Risk Assessment for Banking Systems," Working Papers 79, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
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