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Abstract:
We explore the possible role of interdependence of expectations
in emerging market economies and
analyze the crisis transmission mechanism within the ''pure''
contagion framework. We consider
the cases of Russia, Turkey, and Brazil, and assess whether the
fundamentals of these countries
allowed for the possibility of ''pure'' contagion effects from
each other. In particular, we
look at Russia - Turkey and Brazil - Russia pairs in year 1997
to see whether Brazilian and the
Turkish economies exhibited vulnarability to pure contagion
before the 1998 Russian crisis. We
also repeat the same exercise with the most recent 1999 data.
The rationale for choosing these
pairings is the huge volume of (luggage) trade between
geographical neighbors Russia and Turkey,
and the similar export structures of Russia and Brazil (predominantly
raw materials) which are
continents apart. Our results clearly indicate vulnerability of
Brazilian and Turkish economies
to high probability of crisis in Russia even in the face of
improving fundamentals. In isolation,
Brazilian and Turkish fundamentals were not weak enough to place
them in a sure-crisis situation.
With the incorporation of the Russian link, the multiple
equilibria setting disappeared
for both countries, rendering sure-crisis as the single
equilibrium solution.
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