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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. Frankel, Jeffrey A. & Schmukler, Sergio L., 1998. "Country funds and asymmetric information," Policy Research Working Paper Series 1886, The World Bank.
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  7. 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.
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Cited by:
  1. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2010. "Learning and Complementarities: Implications for Speculative Attacks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7651, C.E.P.R. Discussion Papers.
  2. 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.
  3. Broner, Fernando A, 2006. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5876, C.E.P.R. Discussion Papers.
  4. 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.
  5. 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.
  6. 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.
  7. Guimaraes, Bernardo, 2006. "Dynamics of currency crises with asset market frictions," Journal of International Economics, Elsevier, vol. 68(1), pages 141-158, January.
  8. Bernardo Guimaraes, 2005. "Market Expectations and Currency Crises: Theory and Empirics," 2005 Meeting Papers 174, 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. 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.
  11. Rochon, Celine, 2006. "Devaluation without common knowledge," Journal of International Economics, Elsevier, vol. 70(2), pages 470-489, December.
  12. Pablo Kurlat, . "Optimal Stopping in a Model of Speculative Attacks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  13. 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.

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