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Vulnerability to Purely Contagious Balance of Payment Crises in Emerging Economies: An Application to the Cases of Russia, Turkey, and Brazil

  • Cevdet Akcay
  • Unal Zenginobuz

We explore the possible role of interdependence of expectations in emerging market economies and analyze the crisis transmission mechanism within the ”pure”contagion framework. We consider the cases of Russia, Turkey, and Brazil, and assess whether the fundamentals of these countries allowed for the possibility of ”pure”contagion e¤ects from each other. In particular, we look at Russia - Turkey and Brazil - Russia pairs in year 1997 to see whether Brazilian and the Turkish economies exhibited vulnarability to pure contagion before the 1998 Russian crisis We also repeat the same exercise with the most recent 1999 data. The rationale for choosing these pairings is the huge volume of (luggage) trade between geographical neighbors Russia and Turkey, and the similar export structures of Russia and Brazil (predominantly raw materials) which are continents apart. Our results clearly indicate vulnerability of Brazilian and Turkish economies to high probability of crisis in Russia even in the face of improving fundamentals. In isolation, Brazilian and Turkish fundamentals were not weak enough to place them in a sure-crisis situation. With the incorporation of the Russian link, the multiple equilibria setting disappeared for both countries, rendering sure-crisis as the single equilibrium solution.

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File URL: http://www.econ.boun.edu.tr/public_html/RePEc/pdf/200103.pdf
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Paper provided by Bogazici University, Department of Economics in its series Working Papers with number 2001/03.

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Date of creation: Mar 2001
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Handle: RePEc:bou:wpaper:2001/03
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  1. Velasco, A. & Chang, R., 1998. "The Asian Liquidity Crisis," Working Papers 98-27, C.V. Starr Center for Applied Economics, New York University.
  2. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
  3. 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.
  4. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "The Mexican Peso Crisis: Sudden Death or Death Foretold?," NBER Working Papers 5563, National Bureau of Economic Research, Inc.
  5. Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August.
  6. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407 National Bureau of Economic Research, Inc.
  7. V.V. Chari & Patrick J. Kehoe, 1999. "Asking the right questions about the IMF," Annual Report, Federal Reserve Bank of Minneapolis, pages 3-26.
  8. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
  9. Paul Masson, 1999. "Multiple equilibria, contagion, and the emerging market crises," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  10. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," Working Paper 98-10, Federal Reserve Bank of Atlanta.
  11. Paul R. Masson, 1998. "Contagion; Monsoonal Effects, Spillovers, and Jumps Between Multiple Equilibria," IMF Working Papers 98/142, International Monetary Fund.
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