International Contagion: Implications for Policy

40 Pages Posted: 20 Apr 2016

See all articles by Giovanni Majnoni

Giovanni Majnoni

World Bank

Roberto Chang

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 2000

Abstract

What can the international community do to prevent financial contagion?

Chang and Majnoni try to identify and evaluate the public policy implications of financial contagion on the basis of a very simple model of financial crises. In this model, financial contagion can be driven by a combination of fundamentals and by self-fulfilling market expectations.

The model allows the authors to identify different notions of contagion, especially the distinction between monsoonal effects, spillovers, and switchers between equilibria.

They discuss both domestic and international policy options.

Domestic policies, they say, should be aimed at reducing financial fragility - that is, reducing unnecessary short-term debt commitments. With explicit commitments, the maturity of external debts should be lengthened. With implicit commitments, such as private liability guarantees, they emphasize limiting or eliminating such guarantees, to improve an economy's international liquidity and reduce its exposure to contagion.

Internationally, they stress the need for improving financial standards, which makes it easier to assess when a country is subject to different kinds of contagion. The effectiveness of international rescue packages depends on the kind of contagion to which a country is exposed.

Implications: The international community should help those countries that are already helping themselves.

This paper - a product of the Financial Sector Strategy and Policy Group -is part of a larger effort in the group to study the determinants and policy implications of international financial contagion. The author Giovanni Majnoni may be contacted at gmajnoni@worldbank.org.

Suggested Citation

Majnoni, Giovanni and Chang, Roberto, International Contagion: Implications for Policy (March 2000). World Bank Policy Research Working Paper No. 2306, Available at SSRN: https://ssrn.com/abstract=629156

Giovanni Majnoni (Contact Author)

World Bank ( email )

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Roberto Chang

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics ( email )

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New Brunswick, NJ 08901
United States

National Bureau of Economic Research (NBER)

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