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Vulnerability to purely contagious balance of payment crises in emerging economies: An application to the cases of Russia, Turkey, and Brazil

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  • Akçay, Cevdet
  • Zenginobuz, Unal

Abstract

We explore the possible role of interdependence of expectations in emerging market economies and analyze the crisis transmission mechanism within the ”pure”contagion framework. We consider the cases of Russia, Turkey, and Brazil, and assess whether the fundamentals of these countries allowed for the possibility of ”pure”contagion e¤ects from each other. In particular, we look at Russia - Turkey and Brazil - Russia pairs in year 1997 to see whether Brazilian and the Turkish economies exhibited vulnarability to pure contagion before the 1998 Russian crisis We also repeat the same exercise with the most recent 1999 data. The rationale for choosing these pairings is the huge volume of (luggage) trade between geographical neighbors Russia and Turkey, and the similar export structures of Russia and Brazil (predominantly raw materials) which are continents apart. Our results clearly indicate vulnerability of Brazilian and Turkish economies to high probability of crisis in Russia even in the face of improving fundamentals. In isolation, Brazilian and Turkish fundamentals were not weak enough to place them in a sure-crisis situation. With the incorporation of the Russian link, the multiple equilibria setting disappeared for both countries, rendering sure-crisis as the single equilibrium solution.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 195.

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Date of creation: Jun 2000
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Publication status: Published in Russian and East European Finance and Trade 5.37(2001): pp. 5-21
Handle: RePEc:pra:mprapa:195

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Keywords: contagion; balance of payment crisis; emerging economies; Turkey;

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  1. Paul R. Masson, 1999. "Multiple Equilibria, Contagion, and the Emerging Market Crises," IMF Working Papers 99/164, International Monetary Fund.
  2. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
  3. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," Working Paper 98-10, Federal Reserve Bank of Atlanta.
  4. Roberto Chang & Andres Velasco, 1998. "The Asian liquidity crisis," Working Paper 98-11, Federal Reserve Bank of Atlanta.
  5. Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August.
  6. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "The Mexican Peso Crisis: Sudden Death or Death Foretold?," NBER Working Papers 5563, National Bureau of Economic Research, Inc.
  7. Paul R. Masson, 1998. "Contagion," IMF Working Papers 98/142, International Monetary Fund.
  8. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  9. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407 National Bureau of Economic Research, Inc.
  10. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
  11. V.V. Chari & Patrick J. Kehoe, 1999. "Asking the right questions about the IMF," Annual Report, Federal Reserve Bank of Minneapolis, pages 3-26.
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Cited by:
  1. Hakan Berument & N. Nergiz Dincer, 2004. "Do Capital Flows Improve Macroeconomic Performance in Emerging Markets? : The Turkish Experience," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 40(4), pages 20-32, July.

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