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Optimal Transparency and Risk-Taking to Avoid Currency Crises

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  • Christina E. Bannier
  • Frank Heinemann

Abstract

This paper reconsiders a central bank's problem of determining rules for information dissemination and risk-taking behavior that minimize the probability of currency crises. In a global-games approach, we find that optimal transparency is adversely related to prior market beliefs. In countries with pessimistic prior beliefs about economic performance, the central bank should commit to disclosing information with maximal precision. In addition, it should increase the risk of economic performance. For good prior expectations, posterior information should be of lower precision, depending on the variance of fundamentals. Here, the central bank can reduce the crisis probability by reducing that variance.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 161 (2005)
Issue (Month): 3 (September)
Pages: 374-

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200509)161:3_374:otarta_2.0.tx_2-b

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Cited by:
  1. Yin-Wong Cheung & Daniel Friedman, 2008. "Speculative Attacks: A Laboratory Study in Continuous Time," CESifo Working Paper Series 2420, CESifo Group Munich.
  2. Kasahara, Tetsuya, 2009. "Coordination failure among multiple lenders and the role and effects of public policy," Journal of Financial Stability, Elsevier, vol. 5(2), pages 183-198, June.
  3. Philipp König & Kartik Anand & Frank Heinemann, 2013. "The ‘Celtic Crisis’: Guarantees, Transparency and Systemic Liquidity Risk," Working Papers 13-31, Bank of Canada.
  4. Cornand, Camille & Heinemann, Frank, 2006. "Optimal Degree of Public Information Dissemination," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 158, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Rochon, Celine, 2006. "Devaluation without common knowledge," Journal of International Economics, Elsevier, vol. 70(2), pages 470-489, December.
  6. Ahnert, Toni & Bertsch, Christoph, 2013. "A wake-up call: information contagion and strategic uncertainty," Working Paper Series 282, Sveriges Riksbank (Central Bank of Sweden), revised 01 Mar 2014.

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