At the BIS 21st Annual Conference in June I discussed work by Alfred Lehar and Christine Parlour on “Systemic fragility in decentralised markets.” The paper and my discussion have now been issued as BIS working paper 1062.
Tag Archives: Contagion
Contagion in the Euro Area
In a Vox column, Michal Kobielarz, Burak Uras and Sylvester Eijffinger argue that the re-emergence of spreads between peripheral and core Eurozone countries at the beginning of the Greek crisis reflected contagion fears. They write:
… we explicitly model the endogenous bailout decision of the European Monetary Union. We assume that:
- A country that defaults on its sovereign debt can no longer remain in the EMU, unless it is bailed out;
- The union values each country’s membership and, therefore, suffers a loss if a country exits; and
- The marginal loss associated with allowing a country to leave the union is highest if that particular country is the first to leave (first-exit effect).
… once the first country is gone, letting a second country default and leave the union is not that costly anymore.