13,058 research outputs found

    Speculative Attacks

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    Models with multiple equilibria are a popular way to explain currency attacks. Morris and Shin (1998) have shown that, in the context of those models, unique equilibria may prevail once noisy private information is introduced. In this paper, we generalize the results of Morris and Shin to a broader class of probability distributions and show - using the technique of iterated elimination of dominated strategies - that uniqueness will hold, even if we allow for sunspots and individual uncertainty about strategic behavior of other agents. We provide a clear exposition of the logic of this model and we analyse the impact of transparency on the probability of a speculative attack. For the case of uniform distribution of noisy signals, we show that increased transparency of government policy reduces the likelihood of attacks

    Speculative attacks : unique sunspot equilibrium and transparency

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    Models with multiple equilibria are a popular way to explain currency attacks. Morris and Shin (1998) have shown that, in the context of those models, unique equilibria may prevail once noisy private information is introduced. In this paper, we generalize the results of Morris and Shin to a broader class of probability distributions and show - using the technique of iterated elimination of dominated strategies - that uniqueness will hold, even if we allow for sunspots and individual uncertainty about strategic behavior of other agents. We provide a clear exposition of the logic of this model and we analyse the impact of transparency on the probability of a speculative attack. For the case of uniform distribution of noisy signals, we show that increased transparency of government policy reduces the likelihood of attacks. JEL Classification F 31, D 82Modelle mit multiplen Gleichgewichten sind ein populärer Ansatz zur Erklärung spekulativer Attacken. Morris und Shin (1998) haben jedoch gezeigt, dass auch im Rahmen dieser Modelle eindeutige Gleichgewichte zu erwarten sind, sobald die Spekulanten verzerrte private Signale über die Fundamentaldaten erhalten. In dieser Arbeit verallgemeinern wir die Ergebnisse von Morris und Shin und zeigen, dass die Gleichgewichte selbst dann eindeutig sind, wenn Sunspot Variablen und individuelle Unsicherheit über Strategien zugelassen werden. Zudem analysieren wir, welchen Einfluss Transparenz auf die Wahrscheinlichkeit erfolgreicher Attacken hat. Für den Fall der Gleichverteilung verzerrter Signale zeigen wir, dass bei transparenter Geldpolitik ein Ausbruch solcher Attacken mit geringerer Wahrscheinlichkeit auftritt

    Risk and Wealth in a Model of Self-fulfilling Currency Crises

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    We analyze the effect of risk aversion, wealth and portfolios on the behavior of investors in a global game model of currency crises with continuous action choices. The model generates a rich set of striking theoretical predictions. For example, risk aversion makes currency crises significantly less likely; increased wealth makes crises more likely; and foreign direct investment (illiquid investments in the target currency) make crises more likely. Our results extend linearly to a heterogeneous agent population.Currency crisis, Sunspots, Global games, Risk aversion, Wealth, Portfolio

    The Influence of Large Creditors on Creditor Coordination

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    This paper examines the influence of large creditors in determining the likelihood of debt defaults due to creditor coordination failure. We develop a model in which a large creditor and a group of small creditors independently decide, based on private signals of fundamentals, whether to foreclose on a loan. In the absence of common knowledge of fundamentals, the incidence of failure is uniquely determined. Comparative statics on the unique equilibrium provides simple characterization of the role of large creditors. Our results show that the smaller the large creditor is, the more vulnerable the debtor is to premature foreclosure. We also find that information of relatively high precision available to the large creditor reduces the probability of failure.

    Risk and Wealth in a Model of Self-fulfilling Currency Crises

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    Market participants' risk attitudes, wealth and portfolio composition influence their positions in a pegged foreign currency and, therefore, may have important effects on the sustainability of currency pegs. We analyze such effects in a global game model of currency crises with continuous action choices. The model, solved in closed form, generates a rich set of theoretical predictions consistent with many popular and academic (unmodelled) speculations about the onset and timing of currency crises. The results extend linearly to a heterogeneous agent population.Currency crisis, Global games, Risk aversion, Wealth, Portfolio

    Expectations and information in second generation currency crises models

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    We explore the role of expectations in second generation currency crisis models, proving that sudden shifts in speculators' beliefs can trigger currency devaluations, even without any sizable worsening in the fundamentals. In our incomplete information game, mean-preserving changes in speculatorsÂ’ expectations may drive agents to a unique equilibrium with a self-fulfilling attack. In particular, our model supports the thesis that uncertainty matters, since a sufficiently large increase in speculators' uncertainty over the fundamentals is likely to trigger a currency crisis. Following a recent line of research, we also compare the results of private and public information models and find the following paradox; if speculators have private information, the fact that the state of fundamentals is publicly revealed turns out to be more advantageous to the government when fundamentals are bad.currency crises, speculative attack, multiple equilibria

    Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks

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    Global games of regime change–coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attacks it–have been used to study crises phenomena such as currency attacks, bank runs, debt crises, and political change. We extend the static benchmark examined in the literature by allowing agents to take actions in many periods and to learn about the underlying fundamentals over time. We first provide a simple recursive algorithm for the characterization of monotone equilibria. We then show how the interaction of the knowledge that the regime survived past attacks with the arrival of information over time, or with changes in fundamentals, leads to interesting equilibrium properties. First, multiplicity may obtain under the same conditions on exogenous information that guarantee uniqueness in the static benchmark. Second, fundamentals may predict the eventual regime outcome but not the timing or the number of attacks. Finally, equilibrium dynamics can alternate between phases of tranquillity–where no attack is possible–and phases of distress–where a large attack can occur–even without changes in fundamentals.Global games, coordination, multiple equilibria, information dynamics, crises.

    Information Dynamics and Equilibrium Multiplicity in Global Games of Regime Change

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    Global games of regime change -- that is, coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attacks it -- have been used to study crises phenomena such as currency attacks, bank runs, debt crises, and political change. We extend the static benchmark examined in the literature by allowing agents to accumulate information over time and take actions in many periods. It is shown that dynamics may lead to multiple equilibria under the same information assumptions that guarantee uniqueness in the static benchmark. Multiplicity originates in the interaction between the arrival of information over time and the endogenous change in beliefs induced by the knowledge that the regime survived past attacks. This interaction also generates interesting equilibrium properties, such as the possibility that fundamentals predict the eventual regime outcome but not the timing or the number of attacks, or that dynamics alternate between crises and phases of tranquility without changes in fundamentals.
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