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Speculative Attacks

Author

Listed:
  • Heinemann, Frank
  • Illing, Gerhard

Abstract

Models with multiple equilibria are a popular way to explain currency attacks. Morris and Shin (1998) have shown that, in the context of those models, unique equilibria may prevail once noisy private information is introduced. In this paper, we generalize the results of Morris and Shin to a broader class of probability distributions and show - using the technique of iterated elimination of dominated strategies - that uniqueness will hold, even if we allow for sunspots and individual uncertainty about strategic behavior of other agents. We provide a clear exposition of the logic of this model and we analyse the impact of transparency on the probability of a speculative attack. For the case of uniform distribution of noisy signals, we show that increased transparency of government policy reduces the likelihood of attacks.

Suggested Citation

  • Heinemann, Frank & Illing, Gerhard, 2002. "Speculative Attacks," Munich Reprints in Economics 13070, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:13070
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    File URL: https://epub.ub.uni-muenchen.de/13070/1/Illing_13070.pdf
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    Cited by:

    1. Oh, Frederick Dongchuhl, 2013. "Contagion of a liquidity crisis between two firms," Journal of Financial Economics, Elsevier, vol. 107(2), pages 386-400.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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