The Unholy Trinity of Financial Contagion
George Washington University - Department of Economics; National Bureau of Economic Research (NBER)
Carmen M. Reinhart
Peter G. Peterson Institute for International Economics; National Bureau of Economic Research (NBER)
Carlos A. Vegh
University of Maryland - Department of Economics; University of California at Los Angeles; National Bureau of Economic Research (NBER)
NBER Working Paper No. w10061
Over the last 20 years, some financial events, such as devaluations or defaults, have triggered an immediate adverse chain reaction in other countries -- which we call fast and furious contagion. Yet, on other occasions, similar events have failed to trigger any immediate international reaction. We argue that fast and furious contagion episodes are characterized by "the unholy trinity": (i) they follow a large surge in capital flows; (ii) they come as a surprise; and (iii) they involve a leveraged common creditor. In contrast, when similar events have elicited little international reaction, they were widely anticipated and took place at a time when capital flows had already subsided.
Number of Pages in PDF File: 40working papers series
Date posted: November 12, 2003
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