Regionality Revisited: An Examination of the Direction of Spread of Currency Crisis

33 Pages Posted: 16 Jul 2010

See all articles by Amil Dasgupta

Amil Dasgupta

London School of Economics (LSE); European Corporate Governance Institute (ECGI)

Roberto Leon-Gonzalez

affiliation not provided to SSRN

Anja Shortland

German Institute for Economic Research (DIW Berlin)

Date Written: March 1, 2010

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.

Keywords: Financial Contagion, Exchange Rate, Institutions, Bayesian Model Averaging

JEL Classification: F31, F32, C11

Suggested Citation

Dasgupta, Amil and Leon-Gonzalez, Roberto and Shortland, Anja, Regionality Revisited: An Examination of the Direction of Spread of Currency Crisis (March 1, 2010). DIW Berlin Discussion Paper No. 1023, Available at SSRN: https://ssrn.com/abstract=1640501 or http://dx.doi.org/10.2139/ssrn.1640501

Amil Dasgupta (Contact Author)

London School of Economics (LSE) ( email )

Houghton Street
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European Corporate Governance Institute (ECGI) ( email )

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Belgium

Roberto Leon-Gonzalez

affiliation not provided to SSRN ( email )

Anja Shortland

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

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