The Curse of Non-investment Grade Countries

Roberto Rigobon
Publication Type: 
Paper
Journal Name: 
The Journal of Development Economics
Journal Volume: 
69
Journal Number: 
2
Pages: 
423-449
Publication Year: 
2002

Among the most influential theories of contagion, those based on liquidity arguments have received very little attention in the empirical work. This paper fills part of this gap. Mexico was upgrade from noninvestment to investment grade in March of 2000. This paper examines the impact of this event on the properties of the transmission of shocks between Mexico and several Latin American countries. The paper shows that there is a statistically significant change in the propagation of shocks around the time the upgrade was announced. Moreover, the change in the estimated coefficients can explain between one fourth and a third of the unconditional comovement that these assets experienced before the upgrade. This is strong evidence in favor of the theories of contagion based on market structure as the source of the propagation mechanism.

From the methodological point of view, the paper extends existing identification procedures that solve the problem of estimation in linear simultaneous equations models. The methodology can be used in other Macro and Finance applications where the problem of endogenous variables becomes an important limitation.

JEL Codes: 
F30, C32, C10
Region: 
Latin America/Caribbean
Country: 
Mexico
Topic: 
International Finance
Topic: 
Econometrics and Statistical Methods