NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Contagion in Latin America: Definitions, Measurement, and Policy Implications

Kristin Forbes, Roberto Rigobon

NBER Working Paper No. 7885
Issued in September 2000
NBER Program(s):   IFM

This paper analyzes bond and stock markets in Latin America and uses these patterns to investigate whether contagion occurred in the 1990's. It defines shift-contagion' as a significant increase in cross-market linkages after a shock to one country or region. Several coin-toss examples and a simple model show that the standard tests for contagion are biased due to the presence of heteroscedasticity, endogeneity, and omitted-variable bias. Recent empirical work which addresses these problems finds little evidence of shift-contagion during a range of crisis periods. Instead, this work argues that many countries are highly interdependent' in all states of the world and the strong cross-country linkages which exist after a crisis are not significantly different than those during more stable periods. These findings have a number of implications for Latin America.

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Document Object Identifier (DOI): 10.3386/w7885

Published: Roberto Rigobón & Kristin Forbes, 2001. "Contagion in Latin America: Definitions, Measurement, and Policy Implications," Journal of LACEA Economia, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.

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