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Currency Attacks With Multiple Equilibria And Imperfect Information: The Role Of Wage-Setters

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  • FEMMINIS, GIANLUCA

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.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 11 (2007)
Issue (Month): 01 (February)
Pages: 79-112

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Handle: RePEc:cup:macdyn:v:11:y:2007:i:01:p:79-112_05

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  1. Maurice Obstfeld., 1996. "Destabilizing Effects of Exchange-Rate Escape Clauses," Center for International and Development Economics Research (CIDER) Working Papers C96-075, University of California at Berkeley.
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Cited by:
  1. Moheeput, Ashwin, 2008. "Financial Fragility, Systemic Risks and Informational Spillovers : Modelling Banking Contagion as State-Contingent Change in Cross-Bank Correlation," The Warwick Economics Research Paper Series (TWERPS) 853, University of Warwick, Department of Economics.

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