Currency Crisis Transmission through International Trade

Jamal Ibrahim Haidar

MPRA Paper from University Library of Munich, Germany

Abstract: The Eurozone recent crisis has shown how balance of payments problems in less developed European Monetary Union (EMU) member countries can affect EMU trading partners, spreading the crisis to a larger group of countries. This paper introduces a three-country dynamic general equilibrium model to analyze whether and how terms of trade effects can generate a spillover effect or a currency crisis transmission between countries. Specifically, using a two period model, it incorporates world market clearing conditions for tradables into a new theoretic model, analyzes net capital flow movements between countries, and establishes cross-border macroeconomic linkages. This paper shows how a currency crisis can transmit through the real (trade) sector channel; presents how changes in a foreign country's capital flow condition can influence home country's exchange rate through the change in terms of trade; mathematically proves that the significance of the real sector channel between two countries is positively associated with their trade levels; offers a new trade-related explanation for the occurrence of currency crises between countries; and describes how capital movement between two countries can lead to a currency crisis in one of these countries and in a third country.

Keywords: international trade; general equilibrium model; currency crisis; contagion; capital flows; and exchange rate movement (search for similar items in EconPapers)
JEL-codes: E1 E5 F1 F3 F4 (search for similar items in EconPapers)
Date: 2012-12-31
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Published in Economic Modelling 2.29(2012): pp. 151-157

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Related works:
Journal Article: Currency crisis transmission through international trade (2012)
Working Paper: Currency Crisis Transmission through International Trade
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:112122

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