IDEAS home Printed from https://ideas.repec.org/a/kap/openec/v17y2006i4p399-422.html
   My bibliography  Save this article

International Financial Contagion and the Fund —A Theoretical Framework

Author

Listed:
  • Peter Clark
  • Haizhou Huang

    ()

Abstract

In this paper we provide a model of contagion in which countries are linked through the international capital market which allows borrowing and lending for consumption smoothing. Borrowing from the International Monetary Fund also provides a mechanism for countries to smooth consumption intertemporally. Facing a large shock that makes it impossible for a country simultaneously to achieve a desired minimum level of consumption and to service its foreign debt, the country will default. This will put some upward pressure on world interest rates, which raises the debt service costs of other indebted countries and can generate further rounds of defaults. In this environment the Fund has an important systemic function in lending to members to limit the extent of contagion and default. The Fund can be seen as internalizing the externality generated by the contagion that spreads through the channel of the world capital market that links all countries. Copyright Springer Science + Business Media, LLC 2006

Suggested Citation

  • Peter Clark & Haizhou Huang, 2006. "International Financial Contagion and the Fund —A Theoretical Framework," Open Economies Review, Springer, vol. 17(4), pages 399-422, December.
  • Handle: RePEc:kap:openec:v:17:y:2006:i:4:p:399-422
    DOI: 10.1007/s11079-006-0356-8
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11079-006-0356-8
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June.
    2. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
    3. Peter B. Clark & Haizhou Huang, 2001. "International Financial Contagion and the IMF; A Theoretical Framework," IMF Working Papers 01/137, International Monetary Fund.
    4. Haizhou Huang & Chenggang Xu, 1999. "Financial Institutions, Financial Contagion, and Financial Crises," CID Working Papers 21, Center for International Development at Harvard University.
    5. Marchesi, Silvia & Thomas, Jonathan P, 1999. "IMF Conditionality as a Screening Device," Economic Journal, Royal Economic Society, vol. 109(454), pages 111-125, March.
    6. Manmohan S. Kumar & Paul R Masson & Marcus Miller, 2000. "Global Financial Crises; Institutions and Incentives," IMF Working Papers 00/105, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Inci, A. Can & Li, H.C. & McCarthy, Joseph, 2011. "Financial contagion: A local correlation analysis," Research in International Business and Finance, Elsevier, vol. 25(1), pages 11-25, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:openec:v:17:y:2006:i:4:p:399-422. 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: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.