Contagion of Currency Crises Across Unrelated Countries

Download or read book Contagion of Currency Crises Across Unrelated Countries written by Kenshi Taketa and published by . This book was released on 2004 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper shows that a currency crisis can spread from one country to another even when these countries are unrelated in terms of economic fundamentals. The propagation mechanism lies in each speculator's private information about his/her own type and learning behavior about other speculators' types. Since the payoff of each speculator depends on the behavior of other speculators as determined bytheir types, each speculator's behavior depends on his/her belief about other speculators' types. If a crisis in one country reveals the speculator types, it leads to a revision of each speculator's beliefs about other speculators' types and therefore a change in his/her optimal behavior, which in turn can cause a crisis even in another unrelated country. This paper also shows that the better the economic fundamentals in the country where the crisis originates, the more contagious the original crisis can be.