The Role of Public Information in a Contagious Currency Crisis

This paper examines the effects of communication by the central bank on the likelihood of the contagion of a currency crisis between two countries. The quality of a central bank's communication strategy can influence speculators' strategies, which is a mechanism by which the contagion of a currency crisis from another country evolves either negatively or positively (i.e., increases or reduces the probability of the country experiencing acurrency crisis). The result of the analysis of the threshold for a currency crisis for each country indicate that an increase in communication (i.e., providing more public information) by the central bank can facilitate positive contagion effects while reducing negative effects. Further, public information provides a "focal point" for speculators and makes policy tools more effective in promoting positive contagion effects. However, the effectiveness of accurate public information depends critically on the exante expected state of the economic fundamentals of the country.