2016年-PIIE彼得森国际经济研究所_On_Currency_Crises_and_Contagion_36页_336kb

Summary of "On Currency Crises and Contagion" by Marcel Fratzscher

Core Content

This paper by Marcel Fratzscher investigates the role of contagion in the currency crises of emerging markets during the 1990s. It proposes a non-linear Markov-switching model to systematically compare three potential causes of currency crises: weak economic fundamentals, sunspots (unobservable shifts in investor beliefs), and contagion (the spread of crises through real and financial interdependencies). The study emphasizes the systemic nature of these crises and argues that contagion is a core explanation for the spread of financial crises across countries.

Main Points

• Contagion Definition: Contagion is defined as the transmission of a crisis to a country due to its real and financial interdependence with other countries, rather than due to domestic economic fundamentals. It does not imply that fundamentals are unimportant, but rather that they are not the primary cause of crisis spread.

• Three Channels of Contagion:

  1. Real Integration: Measured through trade competition in third markets and bilateral trade. Countries with stronger trade ties are more vulnerable to contagion.
  2. Financial Interdependence: Analyzed through competition for bank lending and the correlation of asset returns. The presence of a common lender and portfolio flows can facilitate crisis transmission.
  3. Sunspots: Unobservable shifts in investor beliefs that can trigger self-fulfilling crises. These are exogenous and not explained by fundamentals or financial linkages.

• Empirical Methodology:

  • The paper uses a linear infection function to model the spread of crises, incorporating both fundamentals and contagion.
  • It then extends this to a non-linear Markov-switching VAR model to capture regime changes and distinguish between observable (fundamentals, contagion) and unobservable (sunspots) factors.
  • The model allows for cascading effects, where a crisis in one country can spread to others through financial and real linkages.

• Key Findings:

  • Contagion is a major driver of currency crises in emerging markets.
  • Fundamentals alone are insufficient to explain the timing and severity of crises.
  • The Markov-switching model has remarkable predictive power, particularly for the 1997-98 Asian crisis.
  • The degree of financial interdependence and real integration among emerging markets is crucial in both explaining past crises and predicting future ones.

Data and Definitions

• The empirical analysis is based on 24 open emerging markets (as defined by the IFC, including some transition economies) from 1986 to 1998.
• Currency Crisis Measure (EMP): A continuous variable that combines changes in exchange rates, interest rates, and foreign exchange reserves. It captures both speculative attacks and devaluation pressures.
• Real Integration (REAL-ij): A measure of trade competition in third markets and bilateral trade. It is based on the share of exports and market competition.
• Financial Integration (BANKCOMP-ij): A measure of competition for bank loans, based on the share of lending from a common lender to different countries. It reflects the interdependence in financial flows.

Policy Implications

• The study suggests that systemic factors, such as financial and real interdependence, are critical in understanding and predicting the spread of currency crises.
• Ignoring contagion can lead to an incomplete understanding of crisis dynamics.
• The non-linear Markov-switching model offers a better framework for analyzing financial crises than traditional linear models, especially when considering the interconnectedness of global financial markets.

Conclusion

Fratzscher concludes that contagion is a central mechanism in the transmission of currency crises. Only by accounting for financial and real interdependencies can we improve our understanding of the systemic nature of these crises and enhance the predictive power of our models. The paper provides a methodological contribution to the field of international finance by developing a new approach to measure contagion and testing its significance in the context of emerging market crises.