IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

On currency crises and contagion

  • Marcel Fratzscher

    (European Central Bank, Frankfurt|Main, Germany)

This paper analyses the role of contagion in the currency crises in emerging markets during the 1990s. It employs a non-linear Markov-switching model to conduct a systematic comparison and evaluation of three distinct causes of currency crises: contagion, weak economic fundamentals, and sunspots, i.e. unobservable shifts in agents' beliefs. Testing this model empirically through Markov-switching and panel data models reveals that contagion, i.e. a high degree of real integration and financial interdependence among countries, is a core explanation for recent emerging market crises. The model has a remarkably good predictive power for the 1997-1998 Asian crisis. The findings suggest that in particular the degree of financial interdependence and also real integration among emerging markets are crucial not only in explaining past crises but also in predicting the transmission of future financial crises. Copyright © 2003 John Wiley & Sons, Ltd.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hdl.handle.net/10.1002/ijfe.203
File Function: Link to full text; subscription required
Download Restriction: no

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 8 (2003)
Issue (Month): 2 ()
Pages: 109-129

as
in new window

Handle: RePEc:ijf:ijfiec:v:8:y:2003:i:2:p:109-129
Contact details of provider: Web page: http://www.interscience.wiley.com/jpages/1076-9307/

Order Information: Web: http://jws-edcv.wiley.com/jcatalog/JournalsCatalogOrder/JournalOrder?PRINT_ISSN=1076-9307

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Reuven Glick & Andrew K. Rose, 1998. "Contagion and Trade: Why Are Currency Crises Regional?," NBER Working Papers 6806, National Bureau of Economic Research, Inc.
  2. Marcel Fratzscher, 1998. "Why are currency crises contagious? A comparison of the Latin American Crisis of 1994–1995 and the Asian Crisis of 1997–1998," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 134(4), pages 664-691, December.
  3. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Contagious Currency Crises," NBER Working Papers 5681, National Bureau of Economic Research, Inc.
  4. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
  5. Velasco, A. & Chang, R., 1998. "The Asian Liquidity Crisis," Working Papers 98-27, C.V. Starr Center for Applied Economics, New York University.
  6. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
  7. Goldfajn, Ilan & Valdes, Rodrigo O., 1998. "Are currency crises predictable?," European Economic Review, Elsevier, vol. 42(3-5), pages 873-885, May.
  8. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
  9. R. Gaston Gelos & Ratna Sahay, 2001. "Financial market spillovers in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(1), pages 53-86, March.
  10. Fratzscher, M., 1999. "What Causes Currency Crises: Sunspots, Contagion or Fundamentals?," Economics Working Papers eco99/39, European University Institute.
  11. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
  12. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
  13. Miller, Merton, 1998. "Asian financial crisis," Japan and the World Economy, Elsevier, vol. 10(3), pages 355-358, July.
  14. Charles Engel & Craig S. Hakkio, 1994. "The Distribution of Exchange Rates in the EMS," NBER Working Papers 4834, National Bureau of Economic Research, Inc.
  15. Francis X. Diebold & Joon-Haeng Lee & Gretchen C. Weinbach, 1993. "Regime switching with time-varying transition probabilities," Working Papers 93-12, Federal Reserve Bank of Philadelphia.
  16. Flood, Robert & Marion, Nancy, 1999. "Perspectives on the Recent Currency Crisis Literature," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-26, January.
  17. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  18. Bussière, Matthieu & Fratzscher, Marcel, 2002. "Towards a new early warning system of financial crises," Working Paper Series 0145, European Central Bank.
  19. Drazen, Allan & Masson, Paul R, 1994. "Credibility of Policies versus Credibility of Policymakers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 735-54, August.
  20. Pavan Ahluwalia, 1999. "Discriminating Contagion; An Alternative Explanation of Contagious Currency Crises in Emerging Markets," IMF Working Papers 00/14, International Monetary Fund.
  21. Taimur Baig & Ilan Goldfajn, 1998. "Financial Market Contagion in the Asian Crisis," IMF Working Papers 98/155, International Monetary Fund.
  22. Gomez-Puig, Marta & Montalvo, JoseG., 1997. "A new indicator to assess the credibility of the EMS," European Economic Review, Elsevier, vol. 41(8), pages 1511-1535, August.
  23. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
  24. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  25. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
  26. Barry Eichengreen, James Tobin, and Charles Wyplosz., 1994. "Two Cases for Sand in the Wheels of International Finance," Center for International and Development Economics Research (CIDER) Working Papers C94-045, University of California at Berkeley.
  27. International Monetary Fund, 1999. "Sources of Contagion; Finance or Trade?," IMF Working Papers 99/146, International Monetary Fund.
  28. Taimur Baig & Ilan Goldfajn, 2000. "The Russian default and the contagion to Brazil," Textos para discussão 420, Department of Economics PUC-Rio (Brazil).
  29. 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.
  30. Franklin Allen & Douglas Gale, 1999. "Financial Contagion," Levine's Working Paper Archive 2092, David K. Levine.
  31. Jeanne, Olivier & Masson, Paul R, 1998. "Currency Crises, Sunspots and Markov-Switching Regimes," CEPR Discussion Papers 1990, C.E.P.R. Discussion Papers.
  32. Fischer, S. & Cooper, R.N. & Dornbusch, R. & Garber, P.M. & Massad, C. & Polak, J.J. & Rodrik, D. & Tarapore, S.S., 1998. "Should the IMF Pursue Capital-Account Convertibility?," Princeton Essays in International Economics 207, International Economics Section, Departement of Economics Princeton University,.
  33. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  34. Allen, Franklin & Gale, Douglas, 2000. "Optimal currency crises," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 177-230, December.
  35. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  36. Ilan Goldfajn & Rodrigo O. Valdés, 1997. "Capital Flows and the Twin Crises ; The Role of Liquidity," IMF Working Papers 97/87, International Monetary Fund.
  37. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  38. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  39. Calvo, Sara & Reinhart, Carmen, 1996. "Capital flows to Latin America : Is there evidence of contagion effects?," Policy Research Working Paper Series 1619, The World Bank.
  40. Gerlach, Stefan & Smets, Frank, 1995. "Contagious speculative attacks," European Journal of Political Economy, Elsevier, vol. 11(1), pages 45-63, March.
  41. Morris Goldstein, 1998. "The Asian Financial Crisis," Policy Briefs PB98-1, Peterson Institute for International Economics.
  42. Catherine A. Pattillo & Andrew Berg, 1998. "Are Currency Crises Predictable? a Test," IMF Working Papers 98/154, International Monetary Fund.
  43. Ranil Salgado & Luca Antonio Ricci & Francesco Caramazza, 2000. "Trade and Financial Contagion in Currency Crises," IMF Working Papers 00/55, International Monetary Fund.
  44. Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August.
  45. Maria Soledad Martinez Peria, 2002. "A regime-switching approach to the study of speculative attacks: A focus on EMS crises," Empirical Economics, Springer, vol. 27(2), pages 299-334.
  46. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ijf:ijfiec:v:8:y:2003:i:2:p:109-129. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)

or (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.