Intelligent Information Ma nagement, 2011, 3, 137-141
doi: 10.4236/iim.2011.34017 Published Online July 2011 (http://www.SciRP.org/journal/iim)
Copyright © 2011 SciRes. IIM
A Dynamic Cross Contagion Model of Curr ency Crisis
between Two Countries*
Yirong Ying1, Xiangqing Zou1, Ke Chen1,2, Yuyuan Tong1
1 Shanghai University, Shanghai, China
2 Chongqing Jiaotong University, Chongqing, China
E-mail: ckbest@163.com
Received March 31, 2011; revised April 26, 2011; accepted May 10, 2011
Abstract
The contagion aspect of the currency crisis is an important research issue today. In this paper, we set up a
dynamic differential model of currency crisis cross contagions between two countries by expanding general-
ized logistics model, and analyze all kinds of possible equilibrium conditions. It is probably a new idea of
studying currency crisis contagion mechanism.
Keywords: Cross Contagion, Currency Crisis, Differential Dynamic Model
1. Introduction
Since 1970s, currency crisis have occurred frequently on
a global scale. Especially, in the past twenty years, there
have happened several currency crises with significant
influence: European exchange rate system crisis in
1992-1993, Mexican crisis in 1994-1995, southeast
Asian crisis in 1997-1998, Russian rubles crisis in 1998,
Brazilian curren cy crisis in 1998-1999, Turkish lire crisis
in 2000-2001, Argentine peso crisis in 2001-2002 and the
global crisis triggered by American subprime crisis in
2007. They may be caused by unreasonable domestic
economic structures, heavy debt, unsuccessful monetary
policy or external shocks caused by international finan-
cial speculators. However the worse thing than crises
happening frequ ently is crisis contagions within a region
or global area. This leads to more crises impacts on the
economic or financial system over the world. And the
crisis contagions tend to be stronger and stronger, wider
and wider. From the phenomenon perspective, the simple
reason of stronger and wider crises contagions is that the
continuous development of international trade and capi-
tal flows make closer and closer relations of global
economy and finance. But beyond the simple reason,
what is complex mechanism of monetary crisis contag ion?
It will be the focus of this paper.
Since three generations of models were developed to
explain financial crises, many scholars have done a lot in
the area of currency crisis contagion mechanism and con-
tagion path. Olivier Loisel and Philippe Martin (2001)
presented a micro-fou nded model where governments had
an incentive to devalue to increase the national market
share in a monopolistically competitive sector. The con-
clusion showed that the more important trade competition,
the more likely self-fulfilling speculative crises and the
larger the set of multiple equilibria. They also concluded
that coordination decreased the possibility of simultane-
ous self-fulfilling speculative crises in the region and re-
duced the set of multiple equilibria. However, regional
coordination, even though welfare improving, makes
countries more dependent on other countries’ fundamen-
tals so that it may induce more contagion [1]. Helmut Stix
(2007) studied the effects of France interventions during
the 1992-1993 European Monetary System crises. In his
paper, a Markov Switching model is estimated where
interventions influence the probabilities of transition be-
tween one calm and turbulent regime [2]. Eelke de Jong,
Willem F. C, Verschoor and Remco C. J. Zw inkels (2009)
estimated a dynamic hetero-generous agent model for the
British pound during the European monetary system crisis
and illustrate the ch ain of events leading to the suspension
of the pound from the exchange rate mechanism in terms
of switching beliefs [3]. Li Gang, Pan Hao-min and Jia
Wei (2009) empirically studied spatial convergence and
contagious pathes of financial crisis using methods of
spatial statistical analysis. They concluded that conta-
gious paths o f subprime crisis in the United States are the
location of geographic regions, G7 political groups, trade
*This work has been supported by the Research Fund of Program Found-
ation of Education Ministry of China (10YJA790233).