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Informational Contagion of Sudden Stops in a Global Games Framework

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Abstract

This paper highlights the cross-country spread of self-fulfilling financial crises through an informational channel. It sets up a two-country framework of investment with strategic complementarities and incomplete information about economic fundamentals. Each market may be subject to sudden stops, triggered by agents preemptively withdrawing their investments for fear others do so. After observing a massive capital outflow from one country, agents downgrade common fundamentals, and therefore have higher requirements regarding factors specific to the other country. This in turn may induce a crisis in the latter, which is not justified by idiosyncratic events or economic interdependence.

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Authors and Affiliations

  1. TEAM-CNRS, University of Paris-I Panthéon-Sorbonne, 17 rue de la Sorbonne, F-75005, Paris, France

    Victor E. Vaugirard

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  1. Victor E. Vaugirard
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Vaugirard, V.E. Informational Contagion of Sudden Stops in a Global Games Framework. Open Economies Review 15, 169–192 (2004). https://doi.org/10.1023/B:OPEN.0000012301.35570.ee

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  • DOI: https://doi.org/10.1023/B:OPEN.0000012301.35570.ee

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