Contagion: Monsoonal Effects, Spillovers, and Jumps Between Multiple Equilibria

IMF Working Papers, September 1, 1998

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Several concepts of contagion are distinguished.
The paper argues that only models that admit of multiple equilibria are capable of producing true contagion.
Contagion is linked to jumps between multiple equilibria rather than simple spillovers under a single-equilibrium framework.

A simple balance of payments model is presented to illustrate how multiple equilibria generate contagion.
The model focuses on devaluation expectation and devaluation risk in the context of exchange rate pegs and external balances.

Some back-of-the-envelope calculations assess the relevance of the multiple-equilibria contagion mechanism to the coincidence of emerging market crises in 1994–95 and in 1997.
The analysis highlights channels through which shocks in one country can change expectations and precipitate crises in others when multiple equilibria are present.

Subject: Currencies, Emerging and frontier financial markets, Exchange rates, External debt, Financial markets, Foreign exchange, International trade, Money, Trade balance
Keywords: contagion, Currencies, devaluation expectation, devaluation risk, dollar exchange rate peg, East Asia, Emerging and frontier financial markets, emerging-market country, exchange rate, Exchange rates, multiple equilibria, Southeast Asia, spillovers, Trade balance, U.S. dollar, WP

IMF Working Paper: Contagion: Monsoonal Effects, Spillovers, and Jumps Between Multiple Equilibria — Paul R Masson, September 1, 1998.

Contagion: Mousoonal Effects, Spillovers, and Jumps Between Multiple Equilibria - WP/98/142
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