Money market pressure in emerging economies: International contagion versus domestic determinants

Recent market turmoil has again raised the threat of banking crises worldwide. Might these crises be contagious internationally, or are fundamentals more likely to be responsible? This study creates monthly indices of “money market pressure” (MMP) for 20 emerging markets from 2002 to 2010, before using Vector Autoregressive (VAR) methods to test for various spillovers among money and foreign exchange markets. We find that MMP Granger-causes exchange market pressure (EMP) in most countries, but that causality does not run the other direction. Secondly, MMP seems to be more contagious in Southeast Asia than in Latin America or among large emerging markets globally, and the most financially open economies are most susceptible to “direct” spillovers that do not operate through exchange markets. Finally, when examining domestic influences in large emerging markets, output drops are most likely to increase MMP.

► Creates a monthly measure of “Money Market Pressure” (MMP) for 20 emerging markets. ► Finds one-way “contagion” from MMP to Exchange-Market Pressure (EMP). ► Shows Asia to experience more MMP spillovers than Latin America. ► Finds that output drops and economic openness explain direct MMP spillovers.