Cover IMF Working Papers
A Model of Contagious Currency Crises with Application to Argentina
Author: Ms. Nada Choueiri
Series:
IMF Working Papers
Volume/Issue:
Volume 1999: Issue 029
Language:
English
Publication Date:
01 Mar 1999
DOI:
https://doi.org/10.5089/9781451844788.001
ISBN:
9781451844788
ISSN:
1018-5941
Pages:
26
Keywords:
WP; exchange rate; Argentina; contagion; multiple equilibria; risk aversion; fixed exchange rate system; degree of risk aversion; Argentina's economy; exchange rate crisis; contagion effect; crisis in Mexico; exchange rate peg; investors' degree; Exchange rates; Return on investment; Conventional peg; Exchange rate arrangements; Floating exchange rates; Asia and Pacific
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (1.1 MB) Download Epub
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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund