How does contagion occur in financial crises, with specific examples? Flashcards
1
Q
How does contagion occur in financial crises, with specific examples?
A
- Channels of contagion
o Direct financial linkages - distress in one market can impact others with similar exposures
o Investor behaviour and panic - loss of confidence can lead to capital withdrawls
o Trade linkages and economic interdependence - reduced demands for exports can affect global supply chains
o Policy transmission - countries with coordinated monetary policies affected with one country’s crisis - Examples of financial contagion
o The 1997 Asian Financial Crisis
o 2008 US Subprime Mortgage Crisis
o Eurozone Sovereign Debt Crisis (2009 – 2015) - Factors that exacerbate contagion
o Herding behaviour and speculation - investors panic cause widespread sell-off
o Inadequate policy responses - delays in intervention can lead to prolonged uncertainty
o Financial deregulation and complex products - financial innovations can spread risk globally, increase exposure to underlying assets, and exacerbate contagion
