On Currency Crises and Contagion

42 Pages Posted: 20 Jan 2003

See all articles by Marcel Fratzscher

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Date Written: April 2002

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.

Keywords: Currency crises, contagion, Markov-switching, panel data, prediction

JEL Classification: F30, E60, E65, E44

Suggested Citation

Fratzscher, Marcel, On Currency Crises and Contagion (April 2002). Available at SSRN: https://ssrn.com/abstract=357401 or http://dx.doi.org/10.2139/ssrn.357401

Marcel Fratzscher (Contact Author)

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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