A Model of Contagious Currency Crises with Application to Argentina

26 Pages Posted: 12 Feb 2006

See all articles by Nada Choueiri

Nada Choueiri

International Monetary Fund (IMF) - Research Department

Date Written: March 1999

Abstract

This paper proposes a model of contagious currency crises: crises transmit across countries by raising the risk premium on government bonds. Three types of equilibria can occur: a no-collapse equilibrium (crises never transmit from abroad); a collapse equilibrium (crises are inevitably contagious); or a fundamentals equilibrium (crises are contagious if domestic fundamentals are weak). A calibration exercise finds that the 1995 turmoil in Argentina coexisted with a combination of risk-averse investors and weak credibility in the currency board arrangement. This turmoil could only be attributed to a Tequila effect from the Mexican crisis alone if investors were excessively risk-averse.

Keywords: Argentina, contagion, multiple equilibria, risk aversion

JEL Classification: F3, F4

Suggested Citation

Choueiri, Nada, A Model of Contagious Currency Crises with Application to Argentina (March 1999). IMF Working Paper No. 99/29, Available at SSRN: https://ssrn.com/abstract=880556

Nada Choueiri (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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