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Speculative Behaviour, Debt Default and Contagion: An Explanation of the Latin American Crisis 2001-2002

Author

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  • Louise Allsopp

    () (School of Economics, University of Adelaide, Australia)

Abstract

This paper provides a model incorporating strategic speculative behaviour into a framework of debt default and contagion. A basic model of contagion shows how economies which appear fundamentally sound, can fail to meet foreign obligations when there are inter-linkages with a defaulting country. Introducing speculators into the framework increases the incidence of debt default and contagion. However, when these speculators view the economy with a degree of uncertainty, the likelihood of default and contagion is even greater. SpeculatorsÂ’ perceptions over the state of the economy are therefore paramount when estimating the impact of a crisis on a region.

Suggested Citation

  • Louise Allsopp, 2003. "Speculative Behaviour, Debt Default and Contagion: An Explanation of the Latin American Crisis 2001-2002," Centre for International Economic Studies Working Papers 2003-08, University of Adelaide, Centre for International Economic Studies.
  • Handle: RePEc:adl:cieswp:2003-08
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    File URL: http://www.adelaide.edu.au/cies/papers/0308.pdf
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    More about this item

    Keywords

    Currency Crises; Contagion; Common Knowledge.;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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