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Financial contagion and economic development: An epidemiological approach

Author

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  • Bucci, Alberto
  • La Torre, Davide
  • Liuzzi, Danilo
  • Marsiglio, Simone

Abstract

We develop an epidemiological approach to analyze how financial contagion may affect and be affected by economic activity. We show that, according to specific parameter values, the economy may converge either to a non-speculative or to a speculative equilibrium: in the former situation the level of per capita income is maximal, while in the latter it is reduced by financial contagion. The presence of economic and financial feedback effects may also give rise to macroeconomic fluctuations during the transitional path, clearly showing that such economic and financial links are an important driver of the short run macroeconomic performance. By extending the analysis to a spatial dimension, we also show that financial contagion in some specific region may propagate quickly also in regions far away from those in which the contagion initially occurs, highlighting the role of regional policy coordination to avoid interregional contagion.

Suggested Citation

  • Bucci, Alberto & La Torre, Davide & Liuzzi, Danilo & Marsiglio, Simone, 2019. "Financial contagion and economic development: An epidemiological approach," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 211-228.
  • Handle: RePEc:eee:jeborg:v:162:y:2019:i:c:p:211-228
    DOI: 10.1016/j.jebo.2018.12.018
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    Keywords

    Diffusion; Economic fluctuations; Economic growth; Financial contagion;

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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