DP1947 Contagion and Trade: Why are Currency Crises Regional

Author(s): Reuven Glick , Andrew K Rose

Publication Date: August 1998

Keyword(s): Empirical , Exchange Rates , Financial , International , Macroeconomic , reserve , Speculative

JEL(s): F32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP1947.asp

Currency crises tend to be regional; they affect countries in geographic proximity. This suggests that patterns of international trade are important in understanding how currency crises spread, above and beyond any macroeconomic phenomena. We provide empirical support for this hypothesis. Using data for five different currency crises (in 1971, 1973, 1992, 1994 and 1997) we show that currency crises affect clusters of countries tied together by international trade. By way of contrast, macroeconomic and financial influences are not closely associated with the cross-country incidence of speculative attacks. We also show that trade linkages help explain cross-country correlations in exchange market pressure during crisis episodes, even after controlling for macroeconomic factors.

Data: For more information on the data for this Discussion Paper click here