Spreading Currency Crises : The Role of Economic Interdependence

Author/Editor:

Wolfram Berger ; Helmut Wagner

Publication Date:

August 1, 2002

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

We analyze in this paper how the mutual dependence of private sector expectations in different countries on one another influences the stability of fixed exchange rate regimes. The crisis probabilities of countries trading with one another are interdependent because wage setters react to an imminent loss of international competitiveness stemming from an increase in the crisis probability of a trading partner. If a currency crisis in one country is perceived to be increasingly likely, the probability of devaluation of its trading partners’ currencies to restore their international competitiveness rises as well. Thus, not only actual devaluations but also an increasing crisis probability may trigger currency crises elsewhere. We show that not only fundamental weaknesses but also spontaneous shifts in market sentiment may play a role in precipitating currency crises.

Series:

Working Paper No. 02/144

Subject:

English

Publication Date:

August 1, 2002

ISBN/ISSN:

9781451856453/1018-5941

Stock No:

WPIEA1442002

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

20

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