Three essays on international macroeconomic interdependence in the Asian crisis

In the last decade, the term contagion has gained popularity in the economic literature. It describes a feature of financial crises that have engulfed a number of countries in the world (ERM 92-93, Argentina, Brazil in 1994, the Asian crisis 1997, the Russian Cold 1998 elsewhere). Contagion is said to be present when cross-market linkages (measured by a number of different statistics, such as, e.g. correlation in asset returns) increase significantly in the times of crises compared to tranquil periods. The first part of the thesis examines the presence of such contagion in interest rate and stock market data in the Asian countries during financial crises. The tests focus on the specific transmission of financial disturbances in the countries afflicted by the crisis. The disturbances that arise when the reduced form is estimated in the first stage of the procedure are identified by a set of dummy variables. The change in the transmission mechanism is captured by the co-efficients on the dummy variable. The second part of the thesis extends the model used in the first part of the thesis. A model is developed based on the co-integration framework. A change in transmission is then graphically detected through the plots of recursive maximum eigenvalues. The results based on a set of financial data suggest that the transmission mechanism substantially changed during the crisis period. This suggests that contagion was present. The final part of the thesis focuses on the investigation of the sources of contagion and its transmission channel. Four sets of data on finance and trade are used to analyse the relative importance of the transmission channels of the shocks between the East Asian countries with their main trading partners. The results show that both trade and financial variables did play fundamental roles in the propagation of the East Asian crisis.