Discriminating Contagion

Abstract

This paper shows that a country’s vulnerability to contagious crises depends on the visible similarities between that country and other countries that are experiencing crises. A country is vulnerable to shifts in investor sentiment if it exhibits weaknesses in the same economic variables as other countries affected by a contagious crisis (particularly the country that started the contagious wave), or if it is located in the same region. The paper uses a sample of 19 emerging markets, and data from the Mexican, Asian, and Russian crises to provide evidence of this discriminating contagion, after controlling for alternative channels of contagion such as trade spillovers and financial linkages.Emerging markets;Exchange rates;Economic models;contagion, exchange rate, currency crises, currency crisis, real exchange rate, crisis episode, crisis index, real effective exchange rate, effective exchange rate, currency markets, nominal exchange rate, financial crisis, bank runs, financial contagion, competitiveness, asian financial crisis, speculative attacks, exchange rate regime, real exchange rate appreciation, exchange rate appreciation, foreign exchange, crisis countries, real exchange rates, crisis episodes, exchange rate depreciation, financial crises, real exchange rate overvaluation, exchange rate peg, banking crises, exchange rate change, deposit insurance, recession, crisis prevention, asian crisis, exchange rate overvaluation, exchange rate changes