## Spreading Currency Crises: The Role of Economic Interdependence

_IMF Working Papers, August 1, 2002_

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## Bibliographic details
- Authors: Wolfram Berger, Helmut Wagner
- Published: August 1, 2002
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451856453.001

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### Summary
- Authors: Wolfram Berger, Helmut Wagner  
- Date: August 1, 2002  
- Series: Working Paper No. 2002/144  
- Pages: 20  
- DOI: https://doi.org/10.5089/9781451856453.001  
- Core claim: Mutual dependence of private sector expectations across countries affects the stability of fixed exchange rate regimes; increases in the perceived crisis probability of one country raise the devaluation probability of its trading partners.

### Mechanism and Findings
- Interdependence channel:
  - 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.
- Triggering factors:
  - Not only actual devaluations but also an increasing crisis probability may trigger currency crises elsewhere.
  - Both fundamental weaknesses and spontaneous shifts in market sentiment may play a role in precipitating currency crises.

### Policy-relevant implications (derived from analysis)
- Monitor and account for cross-country expectation channels when assessing vulnerability of fixed exchange rate regimes.
- Recognize that perceptions and market sentiment can propagate crises even absent immediate fundamentals-based triggers.
- Wage-setting behavior and competitiveness concerns in trading partners are potential amplification mechanisms for crisis propagation.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/spreading-currency-crises-the-role-of-economic-interdependence-15977_