Globalization and changing patterns in the international transmission of shocks in financial markets

Abstract

This paper compares the strength of, and patterns in the transmission of shocks, and currency crises during two periods of globalization—the pre-WWI classical gold standard era, 1880–1914, and the post-Bretton Woods era, 1975–2001. Our results suggest that financial market shocks were more globalized before 1914 compared to the present. We postulate that this difference in systemic stability between the two eras reflects factors such as strong cross-country interdependence fostered through links to gold, the growing financial maturity of advanced countries, and the widening of the center to include a more diverse group of countries spanning several regions.