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The unholy trinity of financial contagion

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  • Reinhart, Carmen
  • Kaminsky, Graciela
  • Vegh, Carlos

Abstract

Over the last 20 years, some financial events, such as devaluations or defaults, have triggered an immediate adverse chain reaction in other countries -- which we call fast and furious contagion. Yet, on other occasions, similar events have failed to trigger any immediate international reaction. We argue that fast and furious contagion episodes are characterized by "the unholy trinity": (i) they follow a large surge in capital flows; (ii) they come as a surprise; and (iii) they involve a leveraged common creditor. In contrast, when similar events have elicited little international reaction, they were widely anticipated and took place at a time when capital flows had already subsided.

Suggested Citation

  • Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2003. "The unholy trinity of financial contagion," MPRA Paper 13878, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:13878
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    References listed on IDEAS

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    More about this item

    Keywords

    financial crises contagion capital flows credit ratings credit banks exchange rates;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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