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On currency crises and contagion
Author(s) -
Fratzscher Marcel
Publication year - 2003
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.203
Subject(s) - economics , unobservable , emerging markets , currency , financial contagion , currency crisis , monetary economics , financial crisis , financial market , predictive power , transmission channel , financial economics , econometrics , macroeconomics , transmission (telecommunications) , finance , philosophy , electrical engineering , epistemology , engineering
This paper analyses 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 1997–1998 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. Copyright © 2003 John Wiley & Sons, Ltd.