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| Author: | Chang, R. Majnoni, G. |
| Title: | Fundamentals, beliefs, and financial contagion |
| Journal: | European Economic Review
2002 : APR, VOL. 46:4-5, p. 801-808 |
| Index terms: | Models Financial crises |
| Freeterms: | Contagion Transparency |
| Language: | eng |
| Abstract: | This paper studies contagion in a model in which financial crises can occur due to both weak fundamentals and adverse self-fulfilling expectations. Contagion emerges only if a crisis in one country leads international investors to rationally update beliefs about fundamentals in other countries. But purely expectational crises may be contagious, as investors may infer that fundamentals are weak. Hence, the structure of information is crucial. The analysis delivers useful lessons for assessing which countries are more vulnerable to contagion, which types of crises are more infectious, and whether increased transparency ameliorates contagion effects. |
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