Working Paper: CEPR ID: DP1947
Authors: Reuven Glick; Andrew K. Rose
Abstract: Currency crises tend to be regional; they affect countries in geographic proximity. This suggests that patterns of international trade are important in understanding how currency crises spread, above and beyond any macroeconomic phenomena. We provide empirical support for this hypothesis. Using data for five different currency crises (in 1971, 1973, 1992, 1994 and 1997) we show that currency crises affect clusters of countries tied together by international trade. By way of contrast, macroeconomic and financial influences are not closely associated with the cross-country incidence of speculative attacks. We also show that trade linkages help explain cross-country correlations in exchange market pressure during crisis episodes, even after controlling for macroeconomic factors.
Keywords: speculative; exchange rates; reserve; international macroeconomic; empirical; financial
JEL Codes: F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial speculative attack (D84) | increased vulnerability in trading partners (F69) |
| strong trade ties (F10) | likelihood of speculative attacks (D84) |
| macroeconomic factors (E66) | currency crises (F31) |
| trade linkages (F19) | cross-country correlations in exchange market pressure (F31) |
| trade linkages (F19) | currency crises (F31) |