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A new & simple model of currency crisis: Bifurcations and the emergence of a bad equilibrium

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  • Gangopadhyay, Partha

Abstract

This paper considers the question of currency crisis in a dynamic setting in which agents do nothold rational expectations. Under a sufficient condition the paper shows the possibility of a collapse of the currency due to a progressive loss of reserves. It is important to note that a collapse is not triggered by a bad policy, or bad luck, but due to a regime-shift from a stable to an unstable and unique steady state – bad equilibrium. In this sense the paper offers a new explanation of currency crisis: a crisis that erupts even when there is no evidence of bad policy, or of multiple equilibria (bad luck). The model is further extended to a case of heterogeneous agents.

Suggested Citation

  • Gangopadhyay, Partha, 2020. "A new & simple model of currency crisis: Bifurcations and the emergence of a bad equilibrium," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 538(C).
    • Handle: RePEc:eee:phsmap:v:538:y:2020:i:c:s0378437119316255
    DOI: 10.1016/j.physa.2019.122860
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    Cited by:

    1. Cooray, Arusha & Gangopadhyay, Partha & Das, Narasingha, 2023. "Causality between volatility and the weekly economic index during COVID-19: The predictive power of efficient markets and rational expectations," International Review of Financial Analysis, Elsevier, vol. 89(C).

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    More about this item

    Keywords

    Bifurcations; Currency crisis; Dynamics of fundamentals; Rational irrationality; Stability properties; Steady states;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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