Contagious Runs: Who Initiates?
11 Pages Posted: 31 Jan 2016
Date Written: January 28, 2016
This paper presents a model of contagious panic between two regions with heterogeneous fragilities. When there is no strategic risk, the spillover is always one-directional; the contagion can only originate from the fundamentally weaker region spilling over to the stronger. When strategic risks due to strategic complementarities cause a self-fullling panic, the direction of the contagion could be reversed; panic in the stronger region could generate a contagious panic in the weaker. We show that this depends on the difference in severity of coordination problems between the two regions and the scale of potential spillovers.
Keywords: Contagion, Self-fulfilling panic, Global games, Network
JEL Classification: D84, D85, G01
Suggested Citation: Suggested Citation