NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Political Contagion in Currency Crises

Allan Drazen

NBER Working Paper No. 7211
Issued in July 1999
NBER Program(s):   IFM

Existing models of contagious currency crises are summarized and surveyed, and it is argued that more weight should be put on political factors. Towards this end, the concept of political contagion introduced, whereby contagion in speculative attacks across currencies arises solely because of political objectives of countries. A specific model of membership' contagion is presented. The desire to be part of a political-economic union, where maintaining a fixed exchange rate is a condition for membership and where the value of membership depends positively on who else is a member, is shown to give rise to potential contagion. We then present evidence suggesting that political contagion may have been important in the 1992-3 EMS crisis.

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Document Object Identifier (DOI): 10.3386/w7211

Published: Political Contagion in Currency Crises, Allan Drazen. in Currency Crises, Krugman. 2000

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