International Financial Contagion
No sooner had the Asian crisis broken out in 1997 than the witch-hunt started. With great indignation every Asian economy pointed fingers. They were innocent bystanders. The fundamental reason for the crisis was this or that - most prominently contagion -
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INTERNATIONAL FINANCIAL CONTAGION
edited by
Stijn Claessens The World Bank U.S.A.
Kristin J. Forbes Massachusetts Institute of Technology U.S.A.
SPRINGER SCIENCE+BUSINESS MEDIA, LLC
ISBN 978-1-4757-3314-3 (eBook) ISBN 978-1-4419-4876-2 DOI 10.1007/978-1-4757-3314-3
Library of Congress Cataloging-in-Publication Data A C.I.P. Catalogue record for this book is availab1e from the Library of Congress.
Copyright© 2001 by Springer Science+ Business Media New York Originally published by Kluwer Academic Publishers in 2001 Softcover reprint ofthe hardcover lst edition 2001
AII rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC. Printed on acid-free paper.
TABLE OF CONTENTS Preface
vii
Acknowledgments
ix
Contributors
Xl
PART I: OVERVIEW: THE THEORY AND EMPIRICS OF CONTAGION 1. International Financial Contagion: An Overview of the Issues and the Book Stijn Claessens and Kristin Forbes
3
2. Contagion: Why Crises Spread and How This Can Be Stopped Stijn Claessens, Rudiger Dornbusch and Yung Chul Park
19
3. Measuring Contagion: Conceptual and Empirical Issues Kristin Forbes and Roberto Rigobon
43
4. The Channels for Financial Contagion Matthew Pritsker
67
PART II: SPECIFIC MECHANISMS DRIVING CONTAGION 5. Crisis Transmission: Evidence from the Debt, Tequila and Asian Flu Crises Jose de Gregorio and Rodrigo Valdes 6. Flight to Quality: Investor Risk Tolerance and the Spread of Emerging Market Crises Barry Eichengreen, Galina Hale and Ashoka Mody
99
129
7. Mutual Fund Investment in Emerging Markets: An Overview Graciela Kaminsky, Richard Lyons and Sergio Schmukler
157
8. Portfolio Diversification, Leverage, and Financial Contagion Garry Schinasi and Todd Smith
187
Table of Contents
VI
PART III:
CASE STUDIES OF CONTAGION
9. Thai Meltdown and Transmission of Recession within the ASEAN4 and NIE4 Tilak Abeysinghe
225
10. Financial Contagion in the East Asian Crisis: With Special Reference to the Republic of Korea Yung Chul Park and Chi-Young Song
241
11. The Russian Default and the Contagion to Brazil Taimur Baig and Ilan Goldfajn
267
12. Contagion of International Financial Crises: The Case of Mexico 301 Santiago Bazdresch and Alejandro Werner 13. Financial Market Spillovers: How Different are the Transition Economies? Gaston Gelos and Ratna Sahay
329
14. Are Financial Crises Becoming More Contagious?: What is the Historical Evidence on Contagion? Michael Bordo and Antu Murshid
367
PART IV: IMPLICATIONS FOR POLICY AND THE INTERNATIONAL FINANCIAL ARCHITECTURE 15. International Contagion: Implications for Policy Roberto Chang and Giovanni Majnoni
407
16. International Financial Reform: Regulatory and Other Issues John Hawkins and Philip Turner
431
PART V:
ORIGINAL CONFERENCE PROGRAM
461
PREFACE No sooner had the Asian crisis broken out in 1997 than the wit
