No. 407 - A Primer on Financial Contagion

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by Marcello Pericoli and Massimo Sbracia June 2001

This paper presents a unified framework to highlight possible channels for the international transmission of financial shocks. We first review the different definitions and measures of contagion used in the literature. We then use a simple multi-country asset pricing model to cast the main elements of the current debate on contagion and provide a stylized account of how a crisis in one country can spread to the world economy. In particular, the model shows how crises can be transmitted across countries, without assuming market imperfections or ad hoc portfolio management rules. Finally, tracking our classification, we survey the results obtained in the empirical literature on contagion.

Published in 2003 in: Journal of Economic Surveys, v. 17, 4, pp. 571-608