Contagion: Does it really exist or is it simply pseudo systemic risk?

Abstract

Financial market participants seem to have already accepted the phenomena of speculative currency attacks being temporarily correlated, with crises passing “contagiously” from one country to another. Yet doubt still exists about whether speculative attacks on a currency are due to its country’s fundamentals or irrespective of them. More conservative economic opinion is that countries with deep mismanagement of national balance sheets and exchange rate policy as well as political irresponsibility, give rise to weaker external positions, from where they suffer higher negative spillover effects. Sadly, despite the possibility of contagious currency crises, being an important policy issue, this paper finds little support by way of systematic empirical analysis. So much so, that the choice is between opting to be a dissident, and, leaving the question unanswered. It chooses the latter.