On currency crises and contagion

Marcel Fratzscher

No 139, Working Paper Series from European Central Bank

Abstract: This paper analyzes the role of contagion in the currency crises in emerging markets during the 1990s. It employs a non-linear Markov-switching model to conduct a systematic comparison and evaluation of three distinct causes of currency crises: contagion, weak economic fundamentals, and sunspots, i.e. unobservable shifts in agents' beliefs. Testing this model empirically through Markov-switching and panel data models reveals that contagion, i.e. a high degree of real integration and financial interdependence among countries, is a core explanation for recent emerging market crises. The model has a remarkably good predictive power for the 1997-98 Asian crisis. The findings suggest that in particular the degree of financial interdependence and also real integration among emerging markets are crucial not only in explaining past crises but also in predicting the transmission of future financial crises. JEL Classification: F30, E60, E65, E44

Keywords: contagion; currency crises; Markov-switching; Panel data; prediction (search for similar items in EconPapers)
Date: 2002-04
Note: 335955
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: On currency crises and contagion (2003)
Working Paper: On Currency Crises and Contagion (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2002139

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