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Equilibrium Currency Crises: Are Multiple Equilibria Self-fulfilling or History Dependent?

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  • Davies, Gareth
  • Vines, David

Abstract

The viability of a fixed exchange rate system is shown to be state- or shock-dependent. We show, simply, Obstfeld's claim that there may be multiple equilibria - multiple shock values for which a regime switch becomes optimal. We distinguish between self-fulfilling and history-dependent crises. In the former, crises may occur due to a jump from one equilibrium to another, even for constant model parameters, including the government's cost of quitting the regime. In the latter, costly expectational adjustment implies that the country's history, embodied in its initial expectations, determines the relevant equilibrium and the likelihood of a crisis.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1239.

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Date of creation: Sep 1995
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Handle: RePEc:cpr:ceprdp:1239

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Related research

Keywords: Currency Crises; Fixed Exchange Rates; Hysteresis; Self-Fulfilling; State-Dependence;

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Cited by:
  1. Miller, Marcus & Zhang, Lei, 1996. "Hyperinflation and Stabilization: Cagan Revisited," CEPR Discussion Papers 1513, C.E.P.R. Discussion Papers.
  2. Jesper Rangvid, 1997. "Deviations from long-run equilibria and probabilities of devaluations: An empirical analysis of Danish realignments," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(3), pages 497-522, September.
  3. Ivan Pastine, 2000. "Speculation and the Decision to Abandon a Fixed Exchange Rate Regime," Econometric Society World Congress 2000 Contributed Papers 0931, Econometric Society.
  4. Michael Bordo & Anna Schwartz, 1996. "Why clashes between internal and external stability goals end in currency crises, 1797–1994," Open Economies Review, Springer, vol. 7(1), pages 437-468, March.
  5. Peter Kenen, 1996. "Analyzing and managing exchange-rate crises," Open Economies Review, Springer, vol. 7(1), pages 469-492, March.
  6. Mundaca,B.G. & Strand,J., 1999. "Speculative attacks in the exchange market with a band policy : a sequential game analysis," Memorandum 01/1999, Oslo University, Department of Economics.
  7. Michael D. Bordo & Anna J. Schwartz, 1996. "Why Clashes Between Internal and External Stability Goals End in Currency Crises, 1797-1994," NBER Working Papers 5710, National Bureau of Economic Research, Inc.
  8. Ozkan, F. Gulcin, 2003. "Explaining ERM realignments: Insights from optimising models of currency crises," Journal of Macroeconomics, Elsevier, vol. 25(4), pages 491-507, December.

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