Crisis Transmission: Evidence from the Debt, Tequila, and Asian Flu Crises

Abstract

The increasing globalization of the economy has put the issue of the international transmission of crises in the front line. Although the word contagion is a rather new concept in international finance, it is the focus of a large number of policy-oriented seminars and debates. The clustering of crises by both region and time are at the heart of this discussion. There are several important questions that need to be answered. In this chapter we focus on a subset of them: (i) What are the propagation channels of international crises across countries (other than common shocks)? (ii) Was the debt crisis contagious? And (iii) are there useful policy instruments to shield countries from contagion? In particular, do capital controls, exchange rate flexibility and the external debt-maturity structure affect contagion? We seek to answer these questions using evidence from three key events: the 1982 debt crisis; the 1994 Mexican devaluation; and the 1997 Asian crisis.

This paper is part of the WIDER/World Bank research project “Contagion: How it Spreads and How it can be Stopped?” Valdés acknowledges partial financial support from FONDECYT, grant No. 1990338. We thank Leonardo Hernández, Ilan Goldfajn, Guillermo Perry, Carmen Reinhart, Roberto Rigobón for helpful suggestions and Pamela Mellado for excellent research assistance. All remaining errors are our responsibility. This paper presents the views of the authors and does not represent in any way positions or views of the Central Bank of Chile.