A Model of Contagious Currency Crises with Application to Argentina

March 1, 1999

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Nada Choueiri. A Model of Contagious Currency Crises with Application to Argentina, (USA: International Monetary Fund, 1999) accessed November 12, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper proposes a model of contagious currency crises: crises transmit across countries by raising the risk premium on government bonds. Three types of equilibria can occur: a “no-collapse” equilibrium (crises never transmit from abroad); a “collapse” equilibrium (crises are inevitably contagious); or a “fundamentals” equilibrium (crises are contagious if domestic fundamentals are weak). A calibration exercise finds that the 1995 turmoil in Argentina coexisted with a combination of risk-averse investors and weak credibility in the currency board arrangement. This turmoil could only be attributed to a Tequila effect from the Mexican crisis alone if investors were excessively risk-averse.

Subject: Conventional peg, Exchange rate arrangements, Exchange rates, Floating exchange rates, Foreign exchange, National accounts, Return on investment

Keywords: Argentina, Argentina's economy, Asia and Pacific, Contagion, Contagion effect, Conventional peg, Crisis in Mexico, Degree of risk aversion, Exchange rate, Exchange rate arrangements, Exchange rate crisis, Exchange rate peg, Exchange rates, Fixed exchange rate system, Floating exchange rates, Investors' degree, Multiple equilibria, Return on investment, Risk aversion, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/029
Stock No:

WPIEA0291999
ISBN:

9781451844788
ISSN:

1018-5941

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