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Speculative behaviour, debt default and contagion: A stylised framework of the Latin American Crisis 2001-2002

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    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. Speculators' perceptions over the state of the economy are therefore paramount when estimating the impact of a crisis on a region.

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    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Discussion%20papers/2003/dp03-10.pdf
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    Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2003/10.

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    Length: 35p.
    Date of creation: Dec 2003
    Date of revision:
    Handle: RePEc:nzb:nzbdps:2003/10
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    Web page: http://www.rbnz.govt.nz
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    1. Franklin Allen & Douglas Gale, 1998. "Financial Contagion Journal of Political Economy," Center for Financial Institutions Working Papers 98-31, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
    3. Fiess, Norbert, 2003. "Capital flows, country risk, and contagion," Policy Research Working Paper Series 2943, The World Bank.
    4. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    5. M. Sbracia & Alessandro Prati, 2002. "Currency Crises and Uncertainty About Fundamentals," IMF Working Papers 02/3, International Monetary Fund.
    6. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, vol. 52(9), pages 1301-1314, September.
    7. Douglas W. Diamond & Raghuram G. Rajan, 2002. "Liquidity Shortages and Banking Crises," NBER Working Papers 8937, National Bureau of Economic Research, Inc.
    8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    9. Wolfram Berger & Helmut Wagner, 2002. "Spreading Currency Crises; The Role of Economic Interdependence," IMF Working Papers 02/144, International Monetary Fund.
    10. Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August.
    11. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-97, June.
    12. Christina E. Bannier, 2003. "Private and Public Information in Self-Fulfilling Currency Crises," International Finance 0309006, EconWPA.
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