Speculative Behaviour, Debt Default and Contagion: An Explanation of the Latin American Crisis 2001-2002

Louise Allsopp ()
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Louise Allsopp: School of Economics, University of Adelaide, Australia

No 2003-08, Centre for International Economic Studies Working Papers from University of Adelaide, Centre for International Economic Studies

Abstract: 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. SpeculatorsÂ’ perceptions over the state of the economy are therefore paramount when estimating the impact of a crisis on a region.

Keywords: Currency Crises; Contagion; Common Knowledge. (search for similar items in EconPapers)
JEL-codes: E44 F34 F41 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2003-03
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