Coordination, cooperation, contagion and currency crises

Olivier Loisel and Philippe Martin

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Abstract: We present a micro-founded model where governments have an incentive to devalue to increase the national market share in a monopolistically competitive sector. Currency crises generated by self-fulfilling expectations are possible because workers demand high wages when they expect a devaluation. This decreases the competitiveness and profits of national firms and induces the government to devalue. We show that the more important trade competition, the more likely self-fulfilling speculative crises and the larger the set of multiple equilibria. Coordination decreases the possibility of simultaneous self-fulfilling speculative crises in the region and reduces the set of multiple equilibria. However, regional coordination, even though welfare improving, makes countries more dependent on other countries' fundamentals so that it may induce more contagion.

Keywords: Contagion; Coordination; Cooperation; Fixed exchange rates; Exchange rate crisis; Trade competition (search for similar items in EconPapers)
Date: 2001-04
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Published in Journal of International Economic Law, 2001, 53 (2), pp.399 - 419. ⟨10.1016/S0022-1996(00)00055-6⟩

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Related works:
Journal Article: Coordination, cooperation, contagion and currency crises (2001)
Working Paper: Coordination, Cooperation, Contagion and Currency Crises (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03609263

DOI: 10.1016/S0022-1996(00)00055-6

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