Looking for Contagion: Evidence from the ERM / Carlo A. Favero, Francesco Giavazzi.

Format:

Book

Author/Creator:

Favero, Carlo A.

Contributor:

National Bureau of Economic Research.

Giavazzi, Francesco.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7797.

NBER working paper series no. w7797

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Looking for Contagion

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Summary:

This paper applies a full-information technique to test for the presence of contagion across the money markets of ERM member countries. We show that whenever it is possible to estimate a model for interdependence, a test for contagion based on a full information technique is more powerful. We test for the presence of contagion after having identified episodes of country-specific shocks, whose effects on other European markets are significantly different from those predictable from the estimated channels of interdependence. Using data on three-months interest rate spreads on German rates for seven countries over the period 1988-1992, we are unable to reject the null of contagion. Our evidence suggest that contagion within the ERM was a general phenomenon, not limited to a subset of weaker countries, the exception in the sample being France. Our results are mute as to the question of what lies behind these episodes of contagion; they show, however, that it is not always true that one only detects contagion when one applies poor statistical techniques.

Notes:

Print version record

July 2000.