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Economic contagion refers to the spread of economic problems from one country or region to another, often through financial market channels. This can happen when a financial crisis or economic downturn in one country leads to investors becoming more risk-averse and pulling their investments out of other countries, leading to a domino effect of economic problems across the region.

Economic contagion can occur as a result of several factors, including:

  • Interdependence of economies: If countries are closely interconnected through trade and investment, the problems in one country can quickly spread to others.
  • Contagion through financial markets: A financial crisis in one country can lead to a panic in financial markets, as investors withdraw their investments from other countries.
  • Herding behavior: Investors may follow the actions of others, leading to a self-fulfilling prophecy of economic problems spreading from one country to another.

Examples of economic contagion include the 1997 Asian financial crisis, where economic problems in Thailand spread to other countries in the region, and the 2008 global financial crisis, which started in the US housing market and quickly spread to other countries.

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