International Contagion : Implications for Policy

March 2000 - What can the international community do to prevent financial contagion? Chang and Majnoni try to identify and evaluate the public policy implications of financial contagion on the basis of a very simple model of financial crises. In this model, financial contagion can be driven by a com...

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Main Author: Majnoni, Giovanni
Other Authors: Chang, Roberto
Format: eBook
Language:English
Published: Washington, D.C The World Bank 1999, 1999
Subjects:
Online Access:
Collection: World Bank E-Library Archive - Collection details see MPG.ReNa
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653 |a Bankruptcy and Resolution of Financial Distress 
653 |a Currencies and Exchange Rates 
653 |a Currency 
653 |a Currency Crises 
653 |a Debt Markets 
653 |a Deposit Insurance 
653 |a Emerging Markets 
653 |a Exchange 
653 |a Exchange Rate 
653 |a External Debts 
653 |a Finance and Financial Sector Development 
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653 |a Financial Fragility 
653 |a Foreign Interest 
653 |a Guarantees 
653 |a Interest Rates 
653 |a International Financial Contagion 
653 |a International Investors 
653 |a Liability 
653 |a Liquidity 
653 |a Market 
653 |a Maturity 
653 |a Options 
653 |a Policy Responses 
653 |a Private Sector Development 
653 |a Short-Term Debt 
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520 |a March 2000 - What can the international community do to prevent financial contagion? Chang and Majnoni try to identify and evaluate the public policy implications of financial contagion on the basis of a very simple model of financial crises. In this model, financial contagion can be driven by a combination of fundamentals and by self-fulfilling market expectations. The model allows the authors to identify different notions of contagion, especially the distinction between monsoonal effects, spillovers, and switchers between equilibria. They discuss both domestic and international policy options. Domestic policies, they say, should be aimed at reducing financial fragility - that is, reducing unnecessary short-term debt commitments. With explicit commitments, the maturity of external debts should be lengthened. With implicit commitments, such as private liability guarantees, they emphasize limiting or eliminating such guarantees, to improve an economy's international liquidity and reduce its exposure to contagion. Internationally, they stress the need for improving financial standards, which makes it easier to assess when a country is subject to different kinds of contagion. The effectiveness of international rescue packages depends on the kind of contagion to which a country is exposed. Implications: The international community should help those countries that are already helping themselves. This paper - a product of the Financial Sector Strategy and Policy Group - is part of a larger effort in the group to study the determinants and policy implications of international financial contagion. The author Giovanni Majnoni may be contacted at gmajnoni@worldbank.org