Even though self-fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge, we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise on their signals about the fundamentals. This unique equilibrium depends not only on the fundamentals, but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading. In contrast to multiple equilibrium models, our model allows analysis of policy proposals directed at curtailing currency attacks.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1687.
Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information F31 - International Economics - - International Finance - - - Foreign Exchange
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