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Title:Regionality revisited: An examination of the direction of spread of currency crisis PDF Logo
Authors:Dasgupta, Amil
Leon-Gonzalez, Roberto
Shortland, Anja
Issue Date:2010
Series/Report no.:Discussion papers // German Institute for Economic Research 1023
Abstract:What determines the direction of spread of currency crises? We examine data on waves of currency crises in 1992, 1994, 1997, and 1998 to evaluate several hypotheses on the determinants of contagion. We simultaneously consider trade competition, financial links, and institutional similarity to the ground-zero country as potential drivers of contagion. To overcome data limitations and account for model uncertainty, we utilize Bayesian methodologies hitherto unused in the empirical literature on contagion. In particular, we use the Bayesian averaging of binary models which allows us to take into account the uncertainty regarding the appropriate set of regressors. We find that institutional similarity to the ground-zero country plays an important role in determining the direction of contagion in all the emerging market currency crises in our dataset. We thus provide persuasive evidence in favour of the wake up call hypothesis for financial contagion. Trade and financial links may also play a role in determining the direction of contagion, but their importance varies amongst the crisis periods.
Subjects:Financial contagion
Exchange rate
Institutions
Bayesian Model Averaging
JEL:F31
F32
C11
Document Type:Working Paper
Appears in Collections:DIW-Diskussionspapiere
Publikationen von Forscherinnen und Forschern des DIW

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