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Contagious Currency Crisis: A Spatial Probit Approach

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  • Álvaro A. Novo
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    Abstract

    We probe the idea that the 1992 currency crisis that affected several European countries was a contagious phenomenon. Using "spatial probit" models, we show that the currency crisis was indeed contagious, with the trade channel favored as the transmission channel. We also test the political channel, but the evidence is hybrid. Contrary to previous work, we find macroeconomic variables to be significant (standard probit is inconsistent and inefficient in the presence of spatial dependence), with poor economic growth playing a significant role. Several European countries had been experiencing poor, even negative, real growth at the time of the crisis.

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    File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/WP200305.pdf
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    Bibliographic Info

    Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200305.

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    Date of creation: 2003
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    Handle: RePEc:ptu:wpaper:w200305

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    1. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
    2. Anselin, Luc & Bera, Anil K. & Florax, Raymond & Yoon, Mann J., 1996. "Simple diagnostic tests for spatial dependence," Regional Science and Urban Economics, Elsevier, vol. 26(1), pages 77-104, February.
    3. Loisel, Olivier & Martin, Philippe, 2001. "Coordination, cooperation, contagion and currency crises," Journal of International Economics, Elsevier, vol. 53(2), pages 399-419, April.
    4. Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Sources of contagion: is it finance or trade?," Journal of International Economics, Elsevier, vol. 54(2), pages 293-308, August.
    5. Pinkse, Joris & Slade, Margaret E., 1998. "Contracting in space: An application of spatial statistics to discrete-choice models," Journal of Econometrics, Elsevier, Elsevier, vol. 85(1), pages 125-154, July.
    6. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    7. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel & Tille, Cedric, 2000. "Competitive devaluations: toward a welfare-based approach," Journal of International Economics, Elsevier, vol. 51(1), pages 217-241, June.
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