Financial Contagion under Different Exchange Rate Regimes

Abstract

This paper reviews the contagion effects of the global financial crises of 1997-99 on five small open economies: the Czech Republic, Greece, Hungary, Israel and Poland. We analyze how the financial markets of these countries were effected under different exchange rate regimes. We look at the impact on exchange rates, interest rates and stock markets. In order to shed some light on the behavior of financial asset holders at times of global crises, we examine the sources of capital flows in Hungary for which country we were able to gather the detailed data necessary for such an analysis. Based on our findings, we offer some concluding remarks regarding the choice of exchange rate regime and the role of capital controls.