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Contagion of Currency Crises across Unrelated Countries without Common Lender

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  • Kenshi Taketa

Abstract

I construct a micro-model to show that a currency crisis can spread from one country to another even when these countries are unrelated in terms of economic fundamentals and there is no capital linkage across countries through a common lender or an interbank market. The key to explaining contagious currency crises in the model lies in each speculator's private information and learning behavior about other speculators' type. Since the payoff of each speculator depends on other speculators' behavior determined by their types, each speculator's behavior depends on her belief about other speculators' types. If a currency crisis in one country reveals the speculators' types to some degree, it leads to an updating of each speculator's belief about other speculators' types and therefore a change in her optimal behavior, which in turn can cause a currency crisis even in another unrelated country without capital linkage. Although the presence of contagion itself is not new in the literature, there is an important implication difference between the literature and this paper. The model shows that the crisis with better economic fundamentals can be more contagious than that with worse economic fundamentals; this has not been shown in the literature. This is because the former conveys information about types of speculators while the latter does not. Even if country B does not suffer from a contagious crisis due to bad economic fundamentals from country A, it does not necessarily mean that it will never suffer contagion from some other country with better economic fundamentals than country A

Suggested Citation

  • Kenshi Taketa, 2004. "Contagion of Currency Crises across Unrelated Countries without Common Lender," Econometric Society 2004 Far Eastern Meetings 509, Econometric Society.
  • Handle: RePEc:ecm:feam04:509
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    File URL: http://repec.org/esFEAM04/up.15224.1078159497.pdf
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    Cited by:

    1. Ahnert, Toni & Bertsch, Christoph, 2013. "A wake-up call: information contagion and strategic uncertainty," Working Paper Series 282, Sveriges Riksbank (Central Bank of Sweden), revised 01 Mar 2014.
    2. Koehler-Geib, Friederike Norma, 2008. "The Effect of Uncertainty on the Occurrence and Spread of Financial Crises," Munich Dissertations in Economics 8067, University of Munich, Department of Economics.
    3. Oh, Frederick Dongchuhl, 2013. "Contagion of a liquidity crisis between two firms," Journal of Financial Economics, Elsevier, vol. 107(2), pages 386-400.

    More about this item

    Keywords

    Contagion; Currency Crises; Global Game;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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