Contagion: How the Asian Crisis Spread

Abstract

The Asian financial crisis has spread from Thailand to other East Asian countries and even to Russia and Latin America, despite major differences among the affected countries. Con¬tagion is the general term for this tendency of financial upheavals to move rapidly across borders. This is not the first time contagion has cropped up—Latin America suffered from a bout following the Mexican peso devaluation of 1994-1995, and international financial panics have occurred sporadically over the past 100 years. Economists do not have a fully satisfactory account of con-tagion, but there is some agreement on the channels of transmission and sources of vulnerability. This paper presents current views on contagion and attempts to identify patterns in recent episodes. It begins by analyzing the mechanics of an attack on the currency— the central event in a contemporary emerging market financial crisis. It describes current thinking about the channels of contagion and the conditions that make countries vulnerable to the affliction. Finally, the note compares Asia in 1997 with Latin America in 1994-1995.