International financial contagion in currency crises

This paper examines the role of financial linkages, especially through a common creditor, in the propagation of emerging market crises during the 1990s. Using panel probit regressions on 41 emerging market countries, it finds that financial linkages played a significant role in the spread of the Mexican, Asian, and Russian crises. The significance of financial linkages emerges after controlling for the role of domestic and external fundamentals, trade spillovers, and financial weaknesses in the affected countries. A strong financial linkage to the crisis country of origin not only substantially raises the probability of contagion, but also helps to explain the observed regional concentration of currency crises. (C) 2003 Elsevier Ltd. All rights reserved.