Interdependence or contagion: A model switching approach with a focus on Latin America

Sharada Davidson

Economic Modelling, 2020, vol. 85, issue C, 166-197

Abstract: Empirical research analysing contagion has become increasingly fragmented. Different definitions of contagion have resulted in different methods being deployed to analyse financial transmission channels. This paper devises a novel econometric strategy where the nature of interdependencies, magnitude of interdependencies and transmission channels selected for inclusion can change over time. We thus appeal to multiple definitions of contagion, distinguishing between: interdependence, contagion through interdependence and abrupt contagion through changing linkages. Using our approach we analyse different crisis episodes in Latin America. Results generally indicate interdependence not contagion during the currency crises of the 1990s and Argentine crisis of 1998–2002. During the global financial crisis, results indicate abrupt contagion from the US to Argentina and Brazil. Mexico, however, experiences contagion through existing interdependencies with the US. Results also show that macroeconomic and uncertainty channels play a role during different crises not just financial channels. By establishing whether or not different interdependencies and transmission channels are present during different crises our model switching approach provides new insights.

Keywords: Bayesian panel VAR; Time-varying parameter model; Contagion; Financial crisis; Latin America (search for similar items in EconPapers)
JEL-codes: C11 C30 C52 F0 F40 G15 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:85:y:2020:i:c:p:166-197

DOI: 10.1016/j.econmod.2019.05.015

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