A Model of Contagious Currency Crises with Application to Argentina

Author/Editor:

Nada Choueiri

Publication Date:

March 1, 1999

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:

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.

Series:

Working Paper No. 1999/029

Subject:

Conventional peg Exchange rate arrangements Exchange rates Floating exchange rates Foreign exchange National accounts Return on investment

English

Publication Date:

March 1, 1999

ISBN/ISSN:

9781451844788/1018-5941

Stock No:

WPIEA0291999

Pages:

26

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