An important feature of the recent currency crises have been their rapid spread beyond the countries where they originated. One explanation suggested for the spread of these crises is that a currency crisis in one country leads markets in other countries to anticipate that the trade competitors of that country will devalue their currencies to maintain competiveness. This expectation then causes new currency crises in other countries, similar to a domino effect.; The purpose of this dissertation is to provide an empirical test of the trade competitiveness channel for spreading speculative pressure on currencies, with the focus on Western Europe in the post Bretton Woods period. Included in the sample are 13 countries, which have tied the exchange rate of their currencies, formally or informally, to the Snake or the ERM between 1973–1993. A trade based measure of contagion is developed for each country in the sample, consisting of an index of bilateral trade, weighted by the expected change in the value of the competitor's currency. In order to depict competition in third countries, a pressure index, weighted by categories of export, is added. Two more weights are offered to check for contagion through other sources than the trade channel. These are an unweighted index and an index weighted by the size of GDP. The coefficient for the trade weighted variable is significant and positive in most regressions. This supports the theory that trade competitiveness provides a channel for spreading speculative pressure on currencies.
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