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

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Author Info
Broner, Fernando A

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Abstract

The first 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 first 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5876.

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Date of creation: Oct 2006
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Handle: RePEc:cpr:ceprdp:5876

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Related research
Keywords: currency crises; discrete devaluations; first generation models; multiple equilibria; private information;

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Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tijmen Daniëls & Henk Jager & Franc Klaassen, 2009. "Defending Against Speculative Attacks," SFB 649 Discussion Papers SFB649DP2009-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
    Other versions:
  2. Bernardo Guimaraes, 2008. "Vulnerability of Currency Pegs: Evidence from Brazil," CEP Discussion Papers dp0871, Centre for Economic Performance, LSE. [Downloadable!]
  3. Gara Minguez-Afonso, 2007. "Imperfect Common Knowledge in First-Generation Models of Currency Crises," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 81-112, March. [Downloadable!]
    Other versions:
  4. Guimarães, Bernardo, 2007. "Currency Crisis Triggers: Sunspots or Thresholds?," CEPR Discussion Papers 6487, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Celine Rochon, 2006. "Devaluation without common knowledge," OFRC Working Papers Series 2006fe03, Oxford Financial Research Centre. [Downloadable!]
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