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Learning and Complementarities: Implications for Speculative Attacks

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  • Goldstein, Itay
  • Ozdenoren, Emre
  • Yuan, Kathy

Abstract

We study a model where the aggregate trading of currency speculators reveals new information to the central bank and affects its policy decision. We show that the learning process gives rise to coordination motives among speculators leading to large currency attacks and introducing non-fundamental volatility into exchange rates and policy decisions. We show that the central bank can improve the ex-ante effectiveness of its policy by committing to put a lower weight ex-post on the information from the market, and that transparency may either increase or decrease the effectiveness of learning from the market, depending on how it is implemented.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7651.

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Date of creation: Jan 2010
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Handle: RePEc:cpr:ceprdp:7651

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Keywords: Coordination; Currency attacks; Feedback effects; Financial markets; Global games; Heterogenous information; Strategic complementarities;

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References

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Citations

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Cited by:
  1. Kondor, Péter, 2011. "The more we know on the fundamental, the less we agree on the price," CEPR Discussion Papers 8455, C.E.P.R. Discussion Papers.
  2. Manzano, Carolina & Vives, Xavier, 2010. "Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity," Working Papers 2072/151544, Universitat Rovira i Virgili, Department of Economics.
  3. Eugen Kovac & Jakub Steiner, 2008. "Reversibility in Dynamic Coordination Problems," ESE Discussion Papers 183, Edinburgh School of Economics, University of Edinburgh.
  4. George-Marios Angeletos & Guido Lorenzoni & Alessandro Pavan, 2007. "Wall Street and Silicon Valley: A Delicate Interaction," NBER Working Papers 13475, National Bureau of Economic Research, Inc.
  5. Philip Bond & Alex Edmans & Itay Goldstein, 2011. "The Real Effects of Financial Markets," NBER Working Papers 17719, National Bureau of Economic Research, Inc.

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