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Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises

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  • Fernando A Broner

Abstract

The rst 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 rst 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

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 309.

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Date of creation: Aug 2006
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Handle: RePEc:bge:wpaper:309

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Keywords: Currency crises; ¯rst generation models; private information; discrete devaluations; multiple equilibria.;

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  1. Marina Halac & Sergio L. Schmukler, 2004. "Distributional Effects of Crises: The Financial Channel," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  2. Fernando A. Broner, 2004. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," 2004 Meeting Papers, Society for Economic Dynamics 264, Society for Economic Dynamics.
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  18. V. V. Chari & Patrick J. Kehoe, 2003. "Financial Crises as Herds: Overturning the Critiques," NBER Working Papers 9658, National Bureau of Economic Research, Inc.
  19. Celine Rochon, 2006. "Devaluation without common knowledge," OFRC Working Papers Series, Oxford Financial Research Centre 2006fe03, Oxford Financial Research Centre.
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  25. George-Marios Angeletos & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1497, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  26. V. V. Chari & Patrick J. Kehoe, 2000. "Financial crises as herds," Working Papers, Federal Reserve Bank of Minneapolis 600, Federal Reserve Bank of Minneapolis.
  27. Guimaraes, Bernardo, 2006. "Dynamics of currency crises with asset market frictions," Journal of International Economics, Elsevier, Elsevier, vol. 68(1), pages 141-158, January.
  28. Cavallari, Lilia & Corsetti, Giancarlo, 2000. "Shadow rates and multiple equilibria in the theory of currency crises," Journal of International Economics, Elsevier, Elsevier, vol. 51(2), pages 275-286, August.
  29. Fernando Broner, 1999. "On the timing of balance of payments crises: Disaggregated information and interest rate policy," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 840, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2002.
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  32. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity, and the Timing of Attacks," Econometrica, Econometric Society, Econometric Society, vol. 75(3), pages 711-756, 05.
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Citations

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Cited by:
  1. Guimaraes, Bernardo, 2006. "Dynamics of currency crises with asset market frictions," Journal of International Economics, Elsevier, Elsevier, vol. 68(1), pages 141-158, January.
  2. Gara Minguez-Afonso, 2007. "Imperfect Common Knowledge in First-Generation Models of Currency Crises," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 81-112, March.
  3. George-Marios Angeletos & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1497, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Tijmen Daniëls & Henk Jager & Franc Klaassen, 2009. "Defending Against Speculative Attacks," SFB 649 Discussion Papers SFB649DP2009-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Fernando A. Broner, 2004. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," Working Papers 186, Barcelona Graduate School of Economics.
  6. Guimarães, Bernardo, 2007. "Currency Crisis Triggers: Sunspots or Thresholds?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6487, C.E.P.R. Discussion Papers.
  7. Kathy Yuan & Emre Ozdenoren & Itay Goldstein, 2008. "Learning and Complementarities: Implications for Speculative Attacks," 2008 Meeting Papers 276, Society for Economic Dynamics.
  8. Pablo Kurlat, . "Optimal Stopping in a Model of Speculative Attacks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  9. Bernardo Guimaraes, 2008. "Vulnerability of currency pegs: evidence from Brazil," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 4909, London School of Economics and Political Science, LSE Library.
  10. Bernardo Guimaraes, 2005. "Market Expectations and Currency Crises: Theory and Empirics," 2005 Meeting Papers, Society for Economic Dynamics 174, Society for Economic Dynamics.
  11. 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.
  12. Rochon, Celine, 2006. "Devaluation without common knowledge," Journal of International Economics, Elsevier, Elsevier, vol. 70(2), pages 470-489, December.

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