Why are Currency Crises Contagious?

Executive Summary Currency crises tend to be regional. Since macroeconomic and financial phenomena are not regional, these phenomena are unimportant in understanding why crises spread. But international trade is regional, as countries tend to trade with their neighbors. This suggests that trade links are important in understanding how currency crises spread, above and beyond any macroeconomic phenomena. We provide empirical support for these hypotheses. Using data for five different currency crises (in 1971, 1973, 1992, 1994, and 1997) we show that currency crises affect clusters of countries tied together by international trade. By way of contrast, macroeconomic and financial influences are not closely associated with the cross-country incidence of speculative attacks.