Contagion: Can It Occur Without Trading Relations?
52 Pages Posted: 31 Oct 2019
Date Written: July 15, 2019
The paper explains origin of financial crisis in one country and its spread to other countries - contagion, in a multi country dynamic model of international capital inflow. The origin of crisis is rooted in this model in the common international loan market; thus crisis can occur even when the countries are not interconnected via bilateral or multilateral trade and commerce. The structure can explain various episodes of financial crisis in a common framework. A shift in the risk perception of loan repayment for a particular country is capable of generating a stronger contagion effect than a general shift in risk perception of the lenders. The model can usefully be employed to address the policy issues pertaining to capital inflow from the developed countries to developing countries.
Keywords: Contagion, International Capital Flow, Financial Crisis, Dynamic Programming Principle, Portfolio Theory
JEL Classification: C61, E44, E47, F32, F34, F42, G11
Suggested Citation: Suggested Citation