What is Financial Contagion?

Abstract:     
The phrase financial contagion draws on a concept whose root meaning lies in the field of epidemiology. Like almost all metaphors, this one has the power to illuminate and to mislead. Its referent is the spread of financial distress from one firm, market, asset class, nation, or geographical region to others. But, contagion carries with it other burdens of meaning. First, to refer to contagion, instead of merely to an epidemic, is to implicitly assert that there is a mechanism of transmission from one infected victim to other potential victims. For example, bubonic plague and malaria may give rise to epidemics, but these diseases are not contagious, being transmitted by the bite of a flea and the sting of a mosquito, rather than being spread fromone infected party to another. By contrast, some epidemics may be the result of truly contagious diseases in which the disease spreads directly from one victim to another through the direct transmittal of a pathogen, such as is the case with tuberculosis and AIDS. Second, because a contagious disease spreads from one infected host to others by some mechanism, the key to understanding such a malady is to comprehend the method of transmission. Finally, by invoking a metaphor of illness, financial contagion implies an economic disorder, dislocation, or disease.

Keywords: financial contagion, contagion, crisis, interdependence, transmission, runs, linkages, spillovers, bubbles, bankruptcy

JEL Classification: E65, F30, F21, F22, F24, F12, F42, F55

Accepted Paper Series