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Risk and wealth in a model of self-fulfilling currency attacks

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  • Guimaraes, Bernardo
  • Morris, Stephen

Abstract

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.

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Bibliographic Info

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

Volume (Year): 54 (2007)
Issue (Month): 8 (November)
Pages: 2205-2230

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Handle: RePEc:eee:moneco:v:54:y:2007:i:8:p:2205-2230

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-97, June.
  2. Stephen Morris & Bernardo Guimaraes, 2004. "Risk and Wealth in a Model of Self-Fulfilling Currency Attacks," Yale School of Management Working Papers, Yale School of Management ysm424, Yale School of Management.
  3. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2005. "Signaling in a Global Game: Coordination and Policy Traps," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1400, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Laurent Mathevet, 2010. "A contraction principle for finite global games," Economic Theory, Springer, vol. 42(3), pages 539-563, March.
  5. David M. Frankel & Stephen Morris & Ady Pauzner, 2001. "Equilibrium Selection in Global Games with Strategic Complementarities," Cowles Foundation Discussion Papers 1336, Cowles Foundation for Research in Economics, Yale University.
  6. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Hyun Song Shin, 2001. "Does one Soros make a difference?: a theory of currency crises with large and small traders," LSE Research Online Documents on Economics 25045, London School of Economics and Political Science, LSE Library.
  7. Christophe Chamley, 2003. "Dynamic Speculative Attacks," American Economic Review, American Economic Association, vol. 93(3), pages 603-621, June.
  8. Frankel, David M. & Pauzner, Ady, 2000. "Resolving Indeterminacy in Dynamic Settings: The Role of Shocks," Staff General Research Papers 11924, Iowa State University, Department of Economics.
  9. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, vol. 48(1), pages 133-153, February.
  10. Christian Hellwig & Arijit Mukherji & Aleh Tsyvinski, 2005. "Self-Fulfilling Currency Crises: The Role of Interest Rates," NBER Working Papers 11191, National Bureau of Economic Research, Inc.
  11. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, 08.
  12. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275, Cowles Foundation for Research in Economics, Yale University.
  13. Kraay, Aart, 2003. "Do high interest rates defend currencies during speculative attacks?," Journal of International Economics, Elsevier, vol. 59(2), pages 297-321, March.
  14. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
  15. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, Econometric Society, vol. 61(5), pages 989-1018, September.
  16. Dasgupta, Amil, 2007. "Coordination and delay in global games," Journal of Economic Theory, Elsevier, vol. 134(1), pages 195-225, May.
  17. Goldstein, Itay & Pauzner, Ady, 2004. "Contagion of self-fulfilling financial crises due to diversification of investment portfolios," Journal of Economic Theory, Elsevier, vol. 119(1), pages 151-183, November.
  18. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Shin, Hyun, 2000. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," Cowles Foundation Discussion Papers 1273, Cowles Foundation for Research in Economics, Yale University.
  19. Nikola A. Tarashev, 2003. "Currency Crises and the Informational Role of Interest Rates," BIS Working Papers 135, Bank for International Settlements.
  20. Iván Werning & George-Marios Angeletos, 2006. "Crises and Prices: Information Aggregation, Multiplicity, and Volatility," American Economic Review, American Economic Association, vol. 96(5), pages 1720-1736, December.
  21. Guimaraes, Bernardo, 2006. "Dynamics of currency crises with asset market frictions," Journal of International Economics, Elsevier, vol. 68(1), pages 141-158, January.
  22. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
  23. Fernando A. Broner & R. Gaston Gelos & Carmen M. Reinhart, 2005. "When in Peril, Retrench: Testing the Portfolio Channel of Contagion," Working Papers 207, Barcelona Graduate School of Economics.
  24. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2003. "Coordination and Policy Traps," NBER Working Papers 9767, National Bureau of Economic Research, Inc.
  25. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  26. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  27. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407 National Bureau of Economic Research, Inc.
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