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Discrete devaluations and multiple equilibria in a first generation model of currency crises

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  • Broner, Fernando A.

Abstract

The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency attacks should be predictable and lead to small devaluations. This paper shows that these features of first generation models are not robust to the inclusion of private information. In particular, this paper analyzes a generalization of the Krugman-Flood-Garber (KFG) model, which relaxes the assumption that all consumers are perfectly informed about the level of fundamentals. In this environment, the KFG equilibrium of zero devaluation is only one of many possible equilibria. In all the other equilibria, the lack of perfect information delays the attack on the currency past the point at which the shadow exchange rate equals the peg, giving rise to unpredictable and discrete devaluations.

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Bibliographic Info

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

Volume (Year): 55 (2008)
Issue (Month): 3 (April)
Pages: 592-605

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Handle: RePEc:eee:moneco:v:55:y:2008:i:3:p:592-605

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

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Citations

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Cited by:
  1. Fernando A. Broner, 2004. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," 2004 Meeting Papers 264, Society for Economic Dynamics.
  2. Tijmen R. Daniels & Henk Jager & Franc Klaassen, 2008. "Defending against Speculative Attacks," Tinbergen Institute Discussion Papers 08-090/2, Tinbergen Institute, revised 06 Apr 2009.
  3. Bernardo Guimaraes, 2008. "Vulnerability of Currency Pegs: Evidence from Brazil," CEP Discussion Papers dp0871, Centre for Economic Performance, LSE.
  4. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2010. "Learning and Complementarities: Implications for Speculative Attacks," CEPR Discussion Papers 7651, C.E.P.R. Discussion Papers.
  5. Daniëls, Tijmen R. & Jager, Henk & Klaassen, Franc, 2011. "Currency crises with the threat of an interest rate defence," Journal of International Economics, Elsevier, vol. 85(1), pages 14-24, September.
  6. Guimarães, Bernardo, 2007. "Currency Crisis Triggers: Sunspots or Thresholds?," CEPR Discussion Papers 6487, C.E.P.R. Discussion Papers.
  7. Gara Minguez Afonso, 2006. "Imperfect Common Knowledge in First Generation Models of Currency Crises," FMG Discussion Papers dp555, Financial Markets Group.
  8. Chong Huang, 2011. "Defending Against Speculative Attacks: Reputation, Learning, and Coordination," PIER Working Paper Archive 11-039, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  9. Pablo Kurlat, . "Optimal Stopping in a Model of Speculative Attacks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  10. Rochon, Celine, 2006. "Devaluation without common knowledge," Journal of International Economics, Elsevier, vol. 70(2), pages 470-489, December.
  11. Guimaraes, Bernardo, 2006. "Dynamics of currency crises with asset market frictions," Journal of International Economics, Elsevier, vol. 68(1), pages 141-158, January.
  12. George-Marios Angeletos & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks," Discussion Papers 1497, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Bernardo Guimaraes, 2005. "Market Expectations and Currency Crises: Theory and Empirics," 2005 Meeting Papers 174, Society for Economic Dynamics.

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