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Coordination, cooperation, contagion and currency crises

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  • Loisel, Olivier
  • Martin, Philippe

Abstract

We analyse the effect of trade spillovers and of international coordination on currency crises. To do this, we present a model that builds on two separate literatures: the literature on international monetary cooperation on the one hand, and the literature on currency crises, or more precisely on the 'escape clause' approach of fixed exchange rate systems on the other hand. We show that the more important trade spillovers the more likely self-fulfilling speculative crises are and the larger the set of multiple equilibria. Coordination decreases the possibility of simultaneous self-fulfilling speculative crises in the region and reduces the set of multiple equilibria. However, regional coordination, even though welfare improving, makes countries more dependent on other countries' fundamentals so that it may induce more contagion: a negative shock in one country of the region increases the possibility of a currency crisis in the region because it reduces the feasibility of coordination.
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  • Loisel, Olivier & Martin, Philippe, 2001. "Coordination, cooperation, contagion and currency crises," Journal of International Economics, Elsevier, vol. 53(2), pages 399-419, April.
  • Handle: RePEc:eee:inecon:v:53:y:2001:i:2:p:399-419
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    Citations

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    Cited by:

    1. Roberta De Santis, 2004. "Has Trade Structure Any Importance in the Trasmission of Currency Shocks? An Empirical Application for Central and Eastern European Acceding Countries to Eu," ISAE Working Papers 43, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    2. W.H. Buiter & A Sibert, 1999. "UDROP: A Small Contribution to the International Financial Architecture," CEP Discussion Papers dp0425, Centre for Economic Performance, LSE.
    3. Dungey, Mardi & Fry, Renee & Gonzalez-Hermosillo, Brenda & Martin, Vance, 2006. "Contagion in international bond markets during the Russian and the LTCM crises," Journal of Financial Stability, Elsevier, vol. 2(1), pages 1-27, April.
    4. Giancarlo Marini & Giovanni Piersanti, 2012. "Models of Speculative Attacks and Crashes in International Capital Markets," CEIS Research Paper 245, Tor Vergata University, CEIS, revised 24 Jul 2012.
    5. Álvaro A. Novo, 2003. "Contagious Currency Crisis: A Spatial Probit Approach," Working Papers w200305, Banco de Portugal, Economics and Research Department.
    6. Renée Fry-McKibbin & Cody Hsiao & Chrismin Tang, 2014. "Contagion and Global Financial Crises: Lessons from Nine Crisis Episodes," Open Economies Review, Springer, vol. 25(3), pages 521-570, July.
    7. Loisel, Olivier & Martin, Philippe, 2001. "Coordination, cooperation, contagion and currency crises," Journal of International Economics, Elsevier, vol. 53(2), pages 399-419, April.
    8. Buiter, Willem H. & Sibert, Anne, 1999. "UDROP: A Small Contribution to the New International Financial Architecture," CEPR Discussion Papers 2138, C.E.P.R. Discussion Papers.
    9. Renee Fry & Vance Martin & Brenda Gonzalez-Hermosillo & Mardi Dungey, 2002. "International Contagion Effects from the Russian Crisis and the LTCM Near-Collapse," IMF Working Papers 02/74, International Monetary Fund.

    More about this item

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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