Working Paper: CEPR ID: DP1687
Authors: Stephen Morris; Hyun Song Shin
Abstract: Even though self-fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge, we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise on their signals about the fundamentals. This unique equilibrium depends not only on the fundamentals, but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading. In contrast to multiple equilibrium models, our model allows analysis of policy proposals directed at curtailing currency attacks.
Keywords: currency crisis; common knowledge
JEL Codes: D82; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| imperfect information (D83) | unique equilibrium (C62) |
| noise in signals (C58) | unique equilibrium (C62) |
| critical state of fundamentals (C62) | occurrence of attack (H56) |
| volume of speculators (G15) | critical state of fundamentals (C62) |
| transaction costs (D23) | likelihood of attacks (H56) |
| information structure (L15) | likelihood of attacks (H56) |