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The contagion effect: evidences from former Soviet Economies in Eastern Europe

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  • Insel, Aysu
  • Korkmaz, Abdurrahman

Abstract

This paper analyzes whether or not the contagion effect exists among the seven former-Soviet economies in Eastern Europe: Belarus, Estonia, Latvia, Lithuania, Moldova, Russia and Ukraine throughout the period from November 1996 to December 2009. The evolution of the EU memberships of Estonia, Latvia and Lithuania has been assessed over the membership period (2004:05-2009:12) in comparison to the non-membership period (1995:11-2004:04). Additionally, the economies and the sample period employed in this research give an opportunity to test for two hypotheses on the contagion effect: First, the “flight to quality” hypothesis suggested by Favero and Giavazzi (2002) and second, the “political contagion” hypothesis offered by Drazen (1999). The contagion effect hypotheses for each economy have been tested using the “Threshold Test” proposed by Pesaran and Pick (2007). The econometric method employed in this paper examines only the contagion effect, not the interdependence although the seven economies or groups in the analysis can have interdependence relations. Empirical analysis has highlighted that: (i) the contagion effect exists in the region; (ii) the structure of the contagion mechanism in the region is not stable during the estimation period; (iii) there is an evidence for the validity of “flight to quality” hypothesis; (iv) there is no evidence for the validity of the “political contagion” hypothesis. These results are consistent with the different regional patterns of the former Soviet countries.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24999.

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Date of creation: 14 Sep 2010
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Handle: RePEc:pra:mprapa:24999

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Keywords: contagion; threshold test; Eastern Europe; political contagion; flight to quality;

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References

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  1. Hashem Pesaran & Andreas Pick, 2004. "Econometric Issues in the Analysis of Contagion," Money Macro and Finance (MMF) Research Group Conference 2004 67, Money Macro and Finance Research Group.
  2. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-84, December.
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  15. Dornbusch, Rudiger & Park, Yung Chul & Claessens, Stijn, 2000. "Contagion: Understanding How It Spreads," World Bank Research Observer, World Bank Group, vol. 15(2), pages 177-97, August.
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  17. Rodriguez, Juan Carlos, 2007. "Measuring financial contagion: A Copula approach," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 401-423, June.
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