A Model of Contagious Currency Crises with Application to Argentina

Nada Choueiri

No 1999/029, IMF Working Papers from International Monetary Fund

Abstract: This paper proposes a model of contagious currency crises: crises transmit across countries by raising the risk premium on government bonds. Three types of equilibria can occur: a “no-collapse” equilibrium (crises never transmit from abroad); a “collapse” equilibrium (crises are inevitably contagious); or a “fundamentals” equilibrium (crises are contagious if domestic fundamentals are weak). A calibration exercise finds that the 1995 turmoil in Argentina coexisted with a combination of risk-averse investors and weak credibility in the currency board arrangement. This turmoil could only be attributed to a Tequila effect from the Mexican crisis alone if investors were excessively risk-averse.

Keywords: WP; exchange rate; Argentina; contagion; multiple equilibria; risk aversion; fixed exchange rate system; degree of risk aversion; Argentina's economy; exchange rate crisis; contagion effect; crisis in Mexico; exchange rate peg; investors' degree; Exchange rates; Return on investment; Conventional peg; Exchange rate arrangements; Floating exchange rates; Asia and Pacific (search for similar items in EconPapers)
Pages: 26
Date: 1999-03-01
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Citations: View citations in EconPapers (5)

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