Comments welcome On Crises, Contagion, and Confusion1

Since the Tequila crisis of 1994-95, the Asian flu of 1997, and the Russian virus of 1998, not to mention the Exchange Rate Mechanism Crisis of 1992, which failed to receive a catchy name in the financial press, economists have been busy producing research on the subject of contagion. Yet, less than a handful of studies have examined empirically through which channels the disturbances are transmitted if there are, indeed, fundamental reasons for the spillovers we observe. In this paper, we attempt to fill this gap by analyzing how both trade links and the largely ignored financial sector links influence the pattern of fundamentals-based contagion. We assess the incidence of contagion across regions and time. We then examine the role of international bank lending, the potential for cross-market hedging, and bilateral and third-party trade in the propagation of crises