International Financial Contagion in Currency Crises
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Analyze the techniques and assumptions used by the authors to investigate the importance of financial weaknesses and linkages in the three crises described. On the basis of the evidence presented, how convincing is their conclusion of the following: 'The common creditor is the most important and significant variable, and provides an economic explanation for the regional concentration of crises'?
Provide some examples.
See the following reference: Caramazza, F., Ricci, L., & Salgado, R. (2004). International financial contagion in currency crises. Journal of International Money and Finance, 23(1), 51-70.
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Solution Summary
The following posting discusses financial weaknesses and linkages during financial crises. Concepts discussed include international financial contagion and common creditors.
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Weaknesses and Linkages:
As stated by the author, the controlling roles of the domestic and the external fundamentals, the spillovers in the trade and the financial weaknesses led to the emergence of financial linkages. The spread of difficulty from one economy to another located in the same region is termed as contagion. This is the process that has led to emergence of three crises in the globe. The financial crises are inclusive of: the Mexican crisis that took place between 1994 and1995, the Asian crisis that occurred in 1997 and the Russian crisis of the year 1998. In the analysis of these three markets, the factors that led to the spread of the financial contagion are being assessed on the basis of the nature of the crisis and factors that led to the emergence of the situation in such markets that have significant domestic and external elements. It is paramount to note that the observed regional concentration of the currency crises takes place due to the strong financial linkages in the crisis nations (Salgado, 2004).
Analysis of the Techniques and the Assumptions Utilized:
The author attempts to look at the factors that tend to render a country to be vulnerable to contagion as they look into the emergence of the three stated crisis. It is on the basis of the factors that are held by one nation that the spill over will be determined. The analysis has been placed on the various indicators of the major nation crisis on the basis of the rates of the currency pressures that were experienced. The contagion effect is ...
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