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Theory and practice of contagion in monetary unions. Domino effects in EU Mediterranean countries: The case of Greece, Italy and Spain

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  • Canofari Paolo
  • Di Bartolomeo Giovanni
  • Piersanti Giovanni

Abstract

This paper analyzes strategic interactions and contagion effects in countries joined to a monetary union. Using game theory and a cost-benefit analysis, the paper determines the set of equilibrium solutions under which country-specific shocks are transmitted to other member countries giving rise to contagion. Numerical simulations, obtained by a simple calibration of the model on some key Mediterranean countries of the Euro Zone, show the probabilities of contagion from Greece to Spain and Italy.

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File URL: http://wp.comunite.it/data/wp_no_98_2013.pdf
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Bibliographic Info

Paper provided by Department of Communication, University of Teramo in its series wp.comunite with number 0098.

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Date of creation: Jan 2013
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Handle: RePEc:ter:wpaper:0098

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Web page: http://wp.comunite.it/

Related research

Keywords: Shadow exchange rate; currency crisis; monetary unions; contagion; Nash equilibria;

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References

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  1. Hui, Cho-Hoi & Chung, Tsz-Kin, 2011. "Crash risk of the euro in the sovereign debt crisis of 2009-2010," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(11), pages 2945-2955, November.
  2. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2013. "What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk," Journal of International Money and Finance, Elsevier, Elsevier, vol. 34(C), pages 37-59.
  3. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2011. "Causality and contagion in peripheral EMU public debt markets: a dynamic approach," Working Papers del Instituto Complutense de Estudios Internacionales, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales 08-11, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.
  4. Schuknecht, Ludger & von Hagen, Jürgen & Wolswijk, Guido, 2009. "Government Bond Risk Premiums in the EU revisited: The Impact of the Financial Crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7499, C.E.P.R. Discussion Papers.
  5. Michael G. Arghyrou & Alexandros Kontonikas, 2011. "The EMU sovereign-debt crisis: Fundamentals, expectations and contagion," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 436, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  6. Arghyrou, Michael G. & Kontonikas, Alexandros, 2010. "The EMU sovereign-debt crisis: Fundamentals, expectations and contagion," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-81, Scottish Institute for Research in Economics (SIRE).
  7. Heather D. Gibson & Stephan G. Hall & George S. Tavlas, 2011. "The Greek financial crisis: growing imbalances and sovereign spreads," Discussion Papers in Economics 11/25, Department of Economics, University of Leicester.
  8. Canofari Paolo & Di Bartolomeo Giovanni & Piersanti Giovanni, 2012. "Strategic interactions and contagion effects under monetary unions," wp.comunite, Department of Communication, University of Teramo 0093, Department of Communication, University of Teramo.
  9. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199653126, October.
  10. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 59(2), pages 162-194, June.
  11. Favero, Carlo A. & Missale, Alessandro, 2011. "Sovereign spreads in the Euro area: Which prospects for a Eurobond?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8637, C.E.P.R. Discussion Papers.
  12. Canofari Paolo & Marini Giancarlo & Piersanti Giovanni, 2012. "The sustainability of monetary unions. Can the Euro survive?," wp.comunite, Department of Communication, University of Teramo 0094, Department of Communication, University of Teramo.
  13. Stefan Krause & Fabio Mendez, 2005. "Institutions, Arrangements, and Preferences for Inflation Stability: Evidence and Lessons from a Panel Data Analysis," Emory Economics, Department of Economics, Emory University (Atlanta) 0501, Department of Economics, Emory University (Atlanta).
  14. Miguel A. Segoviano Basurto & Carlos Caceres & Vincenzo Guzzo, 2010. "Sovereign Spreads," IMF Working Papers 10/120, International Monetary Fund.
  15. Rabah Arezki & Bertrand Candelon & Amadou Sy, 2011. "Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis," CESifo Working Paper Series 3411, CESifo Group Munich.
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