Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-13T06:44:22.619Z Has data issue: false hasContentIssue false
  • English
  • Français

CURRENCY ATTACKS WITH MULTIPLE EQUILIBRIA AND IMPERFECT INFORMATION: THE ROLE OF WAGE-SETTERS

Published online by Cambridge University Press:  18 January 2007

GIANLUCA FEMMINIS
GIANLUCA FEMMINIS
Affiliation:
Università Cattolica di Milano
Get access Rights & Permissions [Opens in a new window]

Abstract

We consider a dynamic stochastic model of currency attacks, characterized by imperfect information about a fundamental. Agents not only decide whether to attack the peg but also formulate expectations concerning the probability of future devaluation. The subjective devaluation probabilities influence the inflation expectations, which, in turn, affect the next-period wage level and unemployment. Hence, expectations affect the following-period fundamental and the policymaker's ability to resist an attack. Agents decide upon next-period wage having observed whether the current-period currency attack has been successful or not: this publicly available information is sufficient to allow for a coordination effect among agents, leading to multiple equilibria. Our results imply that a ‘transparent policy’ during a currency crisis is in the policymaker's interest.

Keywords

Currency AttacksFixed Exchange RateGlobal GamesMultiple EquilibriaAsymmetric Information
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 1 , February 2007 , pp. 79 - 112
Copyright
© 2007 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Angeletos G.M., C. Hellwig and A. Pavan, 2003 Coordination and Policy Traps. NBER Working Paper 9767.
Atkeson A. 2001 Rethinking multiple equilibria in macroeconomic modelling: Comment. In B. Bernanke and K. Rogoff (eds.), NBER Macroeconomics Annual 2000, xvol. 15, pp. 162– 170. Cambridge and London: MIT Press.
Balmaseda M., J.J. Dolado and J. D. López-Salido 2000 The dynamic effects of shocks to labour markets: evidence from OECD countries. Oxford Economic Papers 52, 3– 23.Google Scholar
Blanchard O. and J. Wolfers 2000 The role of shocks and institutions in the rise of European unemployment: The aggregate evidence. Economic Journal 110, C1– 33.Google Scholar
Bratsiotis G.J. and W. Robinson 2004 Economic fundamental and self-fulfilling crises: Further evidence from Mexico. Journal of International Money and Finance 23, 595– 614.Google Scholar
Calvo G. 1988 Servicing the public debt: The role of expectations. American Economic Review 78, 647– 661.Google Scholar
Carlsson H. and E. van Damme 1993 Global games and equilibrium selection. Econometrica 61, 989– 1018.Google Scholar
Chamley C. 2003 Dynamic speculative attacks. American Economic Review 93, 603– 621.Google Scholar
Chan K.S. and Y.S. Chiu 2002 The role of (non-)transparency in a currency crisis model. European Economic Review 46, 397– 416.Google Scholar
Corsetti G., P. Pesenti and N. Roubini 1999 Paper tigers? A model of the Asian crisis. European Economic Review 43, 1211– 1236.Google Scholar
Corsetti G., A. Dasgupta, S. Morris and H.S. Shin 2004 Does one Soros make the difference? Review of Economic Studies 71, 87– 113.Google Scholar
Dasgupta A. 2002 Coordination, Learning and Delay. Financial Market Group DP 435.Google Scholar
Dornbusch R. and A.M. Werner 1994 Mexico: Stabilization, reform and no growth. Brookings Papers on Economic Activity 1, 253– 315.Google Scholar
Eichengreen B. and C. Wyplosz 1993 The unstable EMS. Brookings Papers on Economic Activity 1, 51– 124.Google Scholar
Fève P., P.Y. Hénin and P. Jolivaldt 2003 Testing for hysteresis: Unemployment persistence and wage adjustment. Empirical Economics 28, 535– 552.Google Scholar
Fronti J., M. Miller and L. Zhang 2002 Sovereign Default by Argentina: “Slow Motion Train Crash” or Self-Fulfilling Crisis? CEPR DP 3399.
Grimmet G.R. and D.R. Stirzaker 1992 Probability and Random Processes. Oxford: Clarendon Press.
Heinemann F. and G. Illing 2002 Speculative attacks: Unique sunspot equilibrium and transparency. Journal of International Economics 58, 429– 50.Google Scholar
Hellwig C. 2002 Public information, private information and the multiplicity of equilibria in coordination games. Journal of Economic Theory 107, 191– 222.Google Scholar
Herrendorf B., A. Valentinj and R. Waldman 2000 Ruling out multiplicity and indeterminacy: The role of heterogeneity. Review of Economic Studies 67, 295– 307.Google Scholar
Irwin G. and D. Vines 1999 A Krugman–Dooley–Sachs Third Generation Model of the Asian Financial Crisis. CEPR DP 2149.
Jeanne O. 1997 Are currency crises self-fulfilling? A test. Journal of International Economics 43, 263– 286.Google Scholar
Lindbeck A. and D.J. Snower 2001 Insiders versus outsiders. Journal of Economic Perspectives 15, 165– 188.Google Scholar
Ljungqvist L. and T.J. Sargent 1998 The European unemployment dilemma. Journal of Political Economy 106, 514– 550.Google Scholar
Masson P. 1999 Contagion: Monsoonal effects, spillovers and jumps between multiple equilibria. In P. Agenor et al. (eds.), The Asian Financial Crisis: Causes, Contagion and Consequences, pp. 265– 280. Cambridge, UK: Cambridge University Press.
Metz C. 2002 Private and public information in self-fulfilling currency crises. Journal of Economics 76, 65– 85.Google Scholar
Morris S. and H.S. Shin 1998 Unique equilibrium in a model of self-fulfilling currency attacks. American Economic Review 88, 587– 598.Google Scholar
Morris S. and H.S. Shin 1999 A theory of the onset of currency attacks. In P. Agenor et al. (eds.), The Asian Financial Crisis: Causes, Contagion and Consequences, pp. 230– 255, Cambridge, UK: Cambridge University Press.
Morris S. and H.S. Shin 2003 Global Games: Theory and Applications. In M. Dewatripont, L. Hansen, and S. Turnovsky (eds.), Advances in Economics and Econometrics. Cambridge, UK: Cambridge University Press.
Obstfeld M. 1994 The logic of currency crises. Cahiers Economiques et Monetaires de la Banque de France 34, 189– 213.Google Scholar
Obstfeld M. 1996 Model of currency crises with self-fulfilling features. European Economic Review 40, 1037– 1047.Google Scholar
Obstfeld M. 1997 Destabilizing effects of exchange-rate escape clauses. Journal of International Economics 43, 61– 77.Google Scholar
Radelet S. and J. Sachs 1998 The East Asian financial crisis: Diagnosis, remedies, prospects. Brookings Papers on Economic Activity 2, 1– 74.Google Scholar
Rey H. 2001 Rethinking multiple equilibria in macroeconomic modelling: Comment. In B. Bernanke and K. Rogoff (eds.), NBER Macroeconomics Annual 2000, vol. 15, pp. 171– 178. Cambridge and London: MIT Press.
Sutherland Alan 1997 Currency Crises and the Term Structure of Interest Rates: Mimeo University of York, York, UK.
Tarashev N. 2001 Currency Crises and the Informational Role of Interest Rates: Mimeo, Princeton University, Princeton, NJ.
Velasco A. 1996 Fixed exchange rates: Credibility, flexibility and multiplicity. European Economic Review 40, 1023– 1035.Google Scholar