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Looking for Contagion: Evidence from the ERM

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  • Carlo A. Favero
  • Francesco Giavazzi

Abstract

This paper applies a full-information technique to test for the presence of contagion across the money markets of ERM member countries. We show that whenever it is possible to estimate a model for interdependence, a test for contagion based on a full information technique is more powerful. We test for the presence of contagion after having identified episodes of country-specific shocks, whose effects on other European markets are significantly different from those predictable from the estimated channels of interdependence. Using data on three-months interest rate spreads on German rates for seven countries over the period 1988-1992, we are unable to reject the null of contagion. Our evidence suggest that contagion within the ERM was a general phenomenon, not limited to a subset of weaker countries, the exception in the sample being France. Our results are mute as to the question of what lies behind these episodes of contagion; they show, however, that it is not always true that one only detects contagion when one applies poor statistical techniques.

Suggested Citation

  • Carlo A. Favero & Francesco Giavazzi, 2000. "Looking for Contagion: Evidence from the ERM," NBER Working Papers 7797, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7797
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    2. Buch, Claudia M., 2001. "Cross-Border Banking and Transmission Mechanisms: The Case of Europe," Kiel Working Papers 1063, Kiel Institute for the World Economy (IfW Kiel).
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    7. Margarida Abreu, 2003. "Contagion Phenomena in Financial Crises: Evidence from the Portuguese and Spanish Exchange Rate Crises in the Early Nineties," Working Papers Department of Economics 2003/05, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
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    10. Sergio L. Schmukler, 2004. "Financial globalization: gain and pain for developing countries," Economic Review, Federal Reserve Bank of Atlanta, vol. 89(Q 2), pages 39-66.
    11. Fazio, Giorgio, 2007. "Extreme interdependence and extreme contagion between emerging markets," Journal of International Money and Finance, Elsevier, vol. 26(8), pages 1261-1291, December.
    12. filippo gori, 2012. "The risk of self-protection: the role of bank bailout guarantees in channelling sovereign credit risk internationally," IHEID Working Papers 12-2014, Economics Section, The Graduate Institute of International Studies, revised 30 Nov 2014.
    13. Toni Gravelle & Maral Kichian & James Morley, 2003. "Shift Contagion in Asset Markets," Staff Working Papers 03-5, Bank of Canada.
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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F3 - International Economics - - International Finance

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