Contagious Currency Crisis: A Spatial Probit Approach

We probe the idea that the 1992 currency crisis that affected several European countries was a contagious phenomenon. Using "spatial probit" models, we show that the currency crisis was indeed contagious, with the trade channel favored as the transmission channel. We also test the political channel, but the evidence is hybrid. Contrary to previous work, we find macroeconomic variables to be significant (standard probit is inconsistent and inefficient in the presence of spatial dependence), with poor economic growth playing a significant role. Several European countries had been experiencing poor, even negative, real growth at the time of the crisis.