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Speculative attacks: unique equilibrium and transparency

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  • Heinemann, Frank
  • Illing, Gerhard

Abstract

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 apply the method of Morris and Shin to a broader class of probability distributions and show-using the technique of iterated elimination of dominated strategies-that their results continue to 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 analyze 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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 58 (2002)
Issue (Month): 2 (December)
Pages: 429-450

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Handle: RePEc:eee:inecon:v:58:y:2002:i:2:p:429-450

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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  1. Frank Heinemann, 2000. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 316-318, March.
  2. Adam Brandenburger, 1992. "Knowledge and Equilibrium in Games," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 83-101, Fall.
  3. Stephen Morris & Hyun Song Shin, 1999. "Coordination Risk and the Price of Debt," Cowles Foundation Discussion Papers 1241, Cowles Foundation for Research in Economics, Yale University.
  4. Frankel, David M. & Morris, Stephen & Pauzner, Ady, 2003. "Equilibrium Selection in Global Games with Strategic Complementarities," Staff General Research Papers 11920, Iowa State University, Department of Economics.
  5. Jon Faust & Lars E.O. Svensson, 1998. "Transparency and credibility: monetary policy with unobservable goals," International Finance Discussion Papers 605, Board of Governors of the Federal Reserve System (U.S.).
  6. Fukao, Kyoji, 1994. "Coordination Failures under Incomplete Information and Global Games," Discussion Paper Series a299, Institute of Economic Research, Hitotsubashi University.
  7. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
  8. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
  9. Aumann, Robert J., 1974. "Subjectivity and correlation in randomized strategies," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 67-96, March.
  10. Bernheim, B Douglas, 1984. "Rationalizable Strategic Behavior," Econometrica, Econometric Society, vol. 52(4), pages 1007-28, July.
  11. Hans Carlsson & Eric van Damme, 1993. "Global Games and Equilibrium Selection," Levine's Working Paper Archive 122247000000001088, David K. Levine.
  12. Guesnerie, R., 1989. "An Exploration of the Eductive Justifications of the Rational Expectations Hypotbesis," DELTA Working Papers 89-24, DELTA (Ecole normale supérieure).
  13. Frank Heinemann, 1997. "Rationalizable expectations and sunspot equilibria in an overlapping-generations economy," Journal of Economics, Springer, vol. 65(3), pages 257-277, October.
  14. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
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