Currency Crisis Transmission through International Trade

Haidar, Jamal Ibrahim (2012): Currency Crisis Transmission through International Trade. Published in: Economic Modelling , Vol. 29, No. 2 (30 December 2012): pp. 151-157.

Abstract

The Eurozone recent crisis has shown how balance of payments problems in less developed European Monetary Union (EMU) member countries can affect EMU trading partners, spreading the crisis to a larger group of countries. This paper introduces a three-country dynamic general equilibrium model to analyze whether and how terms of trade effects can generate a spillover effect or a currency crisis transmission between countries. Specifically, using a two period model, it incorporates world market clearing conditions for tradables into a new theoretic model, analyzes net capital flow movements between countries, and establishes cross-border macroeconomic linkages. This paper shows how a currency crisis can transmit through the real (trade) sector channel; presents how changes in a foreign country's capital flow condition can influence home country's exchange rate through the change in terms of trade; mathematically proves that the significance of the real sector channel between two countries is positively associated with their trade levels; offers a new trade-related explanation for the occurrence of currency crises between countries; and describes how capital movement between two countries can lead to a currency crisis in one of these countries and in a third country.

• Item Type: MPRA Paper
• Language: English
• Keywords: international trade, general equilibrium model, currency crisis, contagion, capital flows, and exchange rate movement
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; F - International Economics > F1 - Trade; F - International Economics > F3 - International Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance

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