Speculator-triggered crisis and interventions

This paper adds a speculator and an authority to a benchmark global game model to investigate how the speculator endangers a business or an economy, and what the authority can do about it. It is found that the existence of a speculator increases the financial system’s vulnerability by serving as a coordinating device for the investors and thus triggering the crisis. We then compare three different intervention policies imposed by the authority aiming to counteract this effect: deterring the speculator, rewarding holding investors, and eliminating the preemption motives among investors. We argue that the first method may not work because of the multiplicity problem; the second one is useless when a crisis is about to happen; the last tool works given enough effort. We also include a discussion of different intervention polices employed by governments during the 1997 Asian financial crisis to illustrate the theoretical results.