Coordination, Cooperation, Contagion and Currency Crises

CEPR Working Paper No. 2075

Posted: 2 Jul 1999

See all articles by Olivier Loisel

Olivier Loisel

CREST-ENSAE

Philippe Martin

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); Centre for Economic Policy Research (CEPR)

Date Written: February 1999

Abstract

We analyze the effect of trade spillovers and of international coordination on currency crises. To do this, we present a model that builds on two separate literatures: the literature on international monetary cooperation on the one hand, and the literature on currency crises, or more precisely on the "escape clause" approach of fixed exchange rate systems on the other hand. We show that the more important trade spillovers the more likely self-fulfilling speculative crises are and the larger the set of multiple equilibria. Coordination decreases the possibility of simultaneous self-fulfilling speculative crises in the region and reduces the set of multiple equilibria. However, regional coordination, even though welfare improving, makes countries more dependent on other countries' fundamentals so that it may induce more contagion: a negative shock in one country of the region increases the possibility of a currency crisis in the region because it reduces the feasibility of coordination.

JEL Classification: F33, F41, F42

Suggested Citation

Loisel, Olivier and Martin, Philippe, Coordination, Cooperation, Contagion and Currency Crises (February 1999). CEPR Working Paper No. 2075. Available at SSRN: https://ssrn.com/abstract=154675

Olivier Loisel

CREST-ENSAE ( email )

5 avenue Henry Le Chatelier
Palaiseau, 91120
France

Philippe Martin (Contact Author)

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4313 6385 (Phone)
+33 1 4313 6382 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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