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Preventing Currency Crises in Emerging Markets$
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Sebastian Edwards and Jeffrey A. Frankel

Print publication date: 2002

Print ISBN-13: 9780226184944

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226185057.001.0001

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Are Trade Linkages Important Determinants of Country Vulnerability to Crises?

Are Trade Linkages Important Determinants of Country Vulnerability to Crises?

(p.77) 2 Are Trade Linkages Important Determinants of Country Vulnerability to Crises?
Preventing Currency Crises in Emerging Markets
Kristin J. Forbes
University of Chicago Press

This chapter explores the significance of trade channels in the international propagation of financial crises. It describes how trade linkages impacted a country's stock market returns during recent crises. The importance of trade linkages depends on how a country responds to the initial crisis. Then, it analyzes whether three trade channels (competitiveness, income, and cheap-import effects) are important determinants of a country's vulnerability to recent financial crises. The trade linkages, financial linkages, and changes in investor sentiment are the factors affecting a country's stock market returns. Furthermore, it is noted that the way a country responds to a crisis is an important determinant of how that crisis affects other economies. By revealing the different channels through which trade works and by making the point that the way the crisis is handled has implications for how it propagates, it gives a better understanding of the crises compared to previously published papers.

Keywords:   trade channels, financial crises, trade linkages, competitiveness, income, cheap-import effects, financial linkages, stock market

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