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Coordination, cooperation, contagion and currency crises

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  • Loisel, Olivier
  • Martin, Philippe

Abstract

We present a micro-founded model where governments have an incentive to devalue to increase the national market share in a monopolistically competitive sector. Currency crises generated by self-fulfilling expectations are possible because workers demand high wages when they expect a devaluation. This decreases the competitiveness and profits of national firms and induces the government to devalue. We show that the more important trade competition, the more likely self-fulfilling speculative crises and the larger the set of multiple equilibria. Coordination decreases the possibility of simultaneous self-fulfilling speculative crises in the region and reduces the set of multiple equilibria. However, regional coordination, even though welfare improving, makes countries more dependent on other countries' fundamentals so that it may induce more contagion.
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  • Loisel, Olivier & Martin, Philippe, 2001. "Coordination, cooperation, contagion and currency crises," Journal of International Economics, Elsevier, vol. 53(2), pages 399-419, April.
    • Handle: RePEc:eee:inecon:v:53:y:2001:i:2:p:399-419
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    Cited by:

    1. Roberta De Santis, 2004. "Has Trade Structure Any Importance in the Trasmission of Currency Shocks? An Empirical Application for Central and Eastern European Acceding Countries to Eu," ISAE Working Papers 43, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    2. Loisel, Olivier & Martin, Philippe, 2001. "Coordination, cooperation, contagion and currency crises," Journal of International Economics, Elsevier, vol. 53(2), pages 399-419, April.
    3. Dungey, Mardi & Fry, Renee & Gonzalez-Hermosillo, Brenda & Martin, Vance, 2006. "Contagion in international bond markets during the Russian and the LTCM crises," Journal of Financial Stability, Elsevier, vol. 2(1), pages 1-27, April.
    4. Buiter, Willem H. & Sibert, Anne, 1999. "UDROP: a small contribution to the international financial architecture," LSE Research Online Documents on Economics 20224, London School of Economics and Political Science, LSE Library.
    5. Álvaro A. Novo, 2003. "Contagious Currency Crisis: A Spatial Probit Approach," Working Papers w200305, Banco de Portugal, Economics and Research Department.
    6. Ms. Renee Fry & Mr. Vance Martin & Ms. Brenda Gonzalez-Hermosillo & Mr. Mardi Dungey, 2002. "International Contagion Effects from the Russian Crisis and the LTCM Near-Collapse," IMF Working Papers 2002/074, International Monetary Fund.
    7. Park, Sungmin & Kim, Young-Han, 2018. "International policy coordination for financial regime stability under cross-border externalities," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 177-188.
    8. Emiliano Brancaccio & Nadia Garbellini, 2015. "Currency regime crises, real wages, functional income distribution and production," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 12(3), pages 255-276, December.
    9. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126, Decembrie.
    10. Virginie Boinet, 2003. "Partial Delegation in a Model of Currency Crisis," Bulletin of Economic Research, Wiley Blackwell, vol. 55(4), pages 347-355, October.
    11. Buiter, Willem H. & Sibert, Anne, 1999. "UDROP: A Small Contribution to the New International Financial Architecture," CEPR Discussion Papers 2138, C.E.P.R. Discussion Papers.
    12. Giancarlo Marini & Giovanni Piersanti, 2012. "Models of Speculative Attacks and Crashes in International Capital Markets," CEIS Research Paper 245, Tor Vergata University, CEIS, revised 24 Jul 2012.
    13. Renée Fry-McKibbin & Cody Hsiao & Chrismin Tang, 2014. "Contagion and Global Financial Crises: Lessons from Nine Crisis Episodes," Open Economies Review, Springer, vol. 25(3), pages 521-570, July.
    14. Chan Joshua C.C. & Fry-McKibbin Renée A. & Hsiao Cody Yu-Ling, 2019. "A regime switching skew-normal model of contagion," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 23(1), pages 1-24, February.

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    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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