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Working paper

Globalization, Exchange Rate Regimes and Financial Contagion

Nikitin M., Solovyeva A. S., Urosevic B.
We study fragility of financial networks operating in a multi-currency world in the context of a two-country multi-region model a la Allen and Gale (Journal of Political Economy, 2000) with open-economy monetary features of Chang and Velasco (Journal of Economic Theory, 2000). We find that flexible exchange rate regime increases financial fragility of multinational multi-currency networks under a complete system of financial links. On the other hand, a complete system of financial links reduces fragility under monetary union and fear of floating regime, but not necessarily under the flexible rate regime.