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A Model of Contagious Currency Crises with Application to Argentina

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  • Ms. Nada Choueiri

Abstract

This paper proposes a model of contagious currency crises: crises transmit across countries by raising the risk premium on government bonds. Three types of equilibria can occur: a “no-collapse” equilibrium (crises never transmit from abroad); a “collapse” equilibrium (crises are inevitably contagious); or a “fundamentals” equilibrium (crises are contagious if domestic fundamentals are weak). A calibration exercise finds that the 1995 turmoil in Argentina coexisted with a combination of risk-averse investors and weak credibility in the currency board arrangement. This turmoil could only be attributed to a Tequila effect from the Mexican crisis alone if investors were excessively risk-averse.

Suggested Citation

  • Ms. Nada Choueiri, 1999. "A Model of Contagious Currency Crises with Application to Argentina," IMF Working Papers 1999/029, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:1999/029
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    References listed on IDEAS

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    Cited by:

    1. Costa i Font, Joan & Pigem Vigo, Monica, 1999. "Financial Crises and Transmission Mechanisms," ERSA conference papers ersa99pa054, European Regional Science Association.

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