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Learning and Complementarities in Speculative Attacks

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  • Itay Goldstein
  • Emre Ozdenoren
  • Kathy Yuan

Abstract

We study a model where the aggregate trading of currency speculators reveals new information to the central bank and affects its policy decision. We show that the learning process gives rise to coordination motives among speculators leading to large currency attacks and introducing non-fundamental volatility into exchange rates and policy decisions. We show that the central bank can improve the ex ante effectiveness of its policy by committing to put a lower weight ex post on the information from the market, and that transparency may either increase or decrease the effectiveness of learning from the market, depending on how it is implemented. Copyright 2011, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/restud/rdq017
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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 78 (2011)
Issue (Month): 1 ()
Pages: 263-292

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Handle: RePEc:oup:restud:v:78:y:2011:i:1:p:263-292

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Cited by:
  1. Michael Sockin & Wei Xiong, 2013. "Informational Frictions and Commodity Markets," NBER Working Papers 18906, National Bureau of Economic Research, Inc.
  2. Itay Goldstein & Emre Ozdenoren & Kathy Yuan, 2011. "Trading Frenzies and their Impact on Real Investment," FMG Discussion Papers dp670, Financial Markets Group.
  3. Manzano, Carolina & Vives, Xavier, 2010. "Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity," Working Papers 2072/151544, Universitat Rovira i Virgili, Department of Economics.
  4. Eugen Kovac & Jakub Steiner, 2008. "Reversibility in Dynamic Coordination Problems," CERGE-EI Working Papers wp374, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  5. Jakub Steiner & Laurent Mathevet, 2012. "Sand in the Wheels: A Dynamic Global-Game Approach," 2012 Meeting Papers 123, Society for Economic Dynamics.
  6. Dasgupta, Amil & Steiner, Jakub & Stewart, Colin, 2012. "Dynamic coordination with individual learning," Games and Economic Behavior, Elsevier, vol. 74(1), pages 83-101.
  7. Itay Goldstein & Assaf Razin, 2013. "Three Branches of Theories of Financial Crises," NBER Working Papers 18670, National Bureau of Economic Research, Inc.
  8. Mathevet, Laurent & Steiner, Jakub, 2013. "Tractable dynamic global games and applications," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2583-2619.

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