Currency Crisis Transmission through International Trade

17 Pages Posted: 5 Oct 2011 Last revised: 30 Jan 2012

Date Written: March 23, 2011

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, exchange rate movement

JEL Classification: E1, E5, F1, F3, F4

Suggested Citation

Haidar, Jamal Ibrahim, Currency Crisis Transmission through International Trade (March 23, 2011). Economic Modelling, Vol. 29, Issue 2, pp. 151–157, March 2012 , Available at SSRN: https://ssrn.com/abstract=1938665 or http://dx.doi.org/10.2139/ssrn.1938665

Jamal Ibrahim Haidar (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

HOME PAGE: http://scholar.harvard.edu/haidar

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