Working Paper: NBER ID: w10061
Authors: Graciela L. Kaminsky; Carmen M. Reinhart; Carlos A. Végh
Abstract: Over the last 20 years, some financial events, such as devaluations or defaults, have triggered an immediate adverse chain reaction in other countries -- which we call fast and furious contagion. Yet, on other occasions, similar events have failed to trigger any immediate international reaction. We argue that fast and furious contagion episodes are characterized by "the unholy trinity": (i) they follow a large surge in capital flows; (ii) they come as a surprise; and (iii) they involve a leveraged common creditor. In contrast, when similar events have elicited little international reaction, they were widely anticipated and took place at a time when capital flows had already subsided.
Keywords: No keywords provided
JEL Codes: F30; F31; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| surge in capital inflows (F32) | heightened risk of contagion (F65) |
| lack of expectation (D84) | rapid and adverse reaction among investors (G41) |
| leveraged common creditor (G33) | spread of contagion (F65) |
| abrupt capital flow reversals (F32) | significant international repercussions (F69) |
| anticipation of events (D84) | reduced likelihood of contagion (F65) |