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THE WORLD BANK ECONOMIC REVIEW, VOL. 15, NO. 2, 289-314
© 2001 International Bank for Reconstruction and Development / The World Bank

Article

Crisis Transmission: Evidence from the Debt, Tequila, and Asian Flu Crises

José De Gregorio and Rodrigo O. Valdés

The Ministry of Economics, Mining and Energy in Chile, and the Department of Industrial Engineering at the Universidad de Chile. (jdegregorio{at}minecon.cl)
The Ministry of Finance in Chile. (rvaldes{at}minhda.cl)

Abstract

This article analyzes how external crises spread across countries. The authors analyze the behavior of four alternative crisis indicators in a sample of 20 countries during three well-known crises: the 1982 debt crisis, the 1994 Mexican crisis, and the 1997 Asian crisis. The objective is twofold: to revisit the transmission channels of crises, and to analyze whether capital controls, exchange rate flexibility, and debt maturity structure affect the extent of contagion. The results indicate that there is a strong neighborhood effect. Trade links and similarity in precrisis growth also explain (to a lesser extent) which countries suffer more contagion. Both debt composition and exchange rate flexibility to some extent limit contagion, whereas capital controls do not appear to curb it.


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