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Information Dynamics and Equilibrium Multiplicity in Global Games of Regime Change

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  • George-Marios Angeletos
  • Christian Hellwig
  • Alessandro Pavan

Abstract

Global games of regime change -- that is, coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attacks it -- have been used to study crises phenomena such as currency attacks, bank runs, debt crises, and political change. We extend the static benchmark examined in the literature by allowing agents to accumulate information over time and take actions in many periods. It is shown that dynamics may lead to multiple equilibria under the same information assumptions that guarantee uniqueness in the static benchmark. Multiplicity originates in the interaction between the arrival of information over time and the endogenous change in beliefs induced by the knowledge that the regime survived past attacks. This interaction also generates interesting equilibrium properties, such as the possibility that fundamentals predict the eventual regime outcome but not the timing or the number of attacks, or that dynamics alternate between crises and phases of tranquility without changes in fundamentals.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11017.

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Date of creation: Dec 2004
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Handle: RePEc:nbr:nberwo:11017

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  1. Amil Dasgupta, 2002. "Coordination, learning, and delay," LSE Research Online Documents on Economics 24955, London School of Economics and Political Science, LSE Library.
  2. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2004. "Coordination and Policy Traps," Levine's Bibliography 122247000000000294, UCLA Department of Economics.
  3. Heidhues, Paul & Melissas, Nicolas, 2005. "Equilibria in a Dynamic Global Game: The Role of Cohort Effects," CEPR Discussion Papers 4995, C.E.P.R. Discussion Papers.
  4. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, Econometric Society, vol. 61(5), pages 989-1018, September.
  5. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-97, June.
  6. Christophe Chamley, 1999. "Coordinating Regime Switches," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(3), pages 869-905, August.
  7. Hyun Song Shin & Stephen Morris, 1998. "A Theory of the Onset of Currency Attacks," Economics Series Working Papers 1998-W20, University of Oxford, Department of Economics.
  8. Rochet, Jean Charles & Vives, Xavier, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," CEPR Discussion Papers 3233, C.E.P.R. Discussion Papers.
  9. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275R, Cowles Foundation for Research in Economics, Yale University, revised Aug 2001.
  10. David Frankel & Ady Pauzner, 2000. "Resolving Indeterminacy In Dynamic Settings: The Role Of Shocks," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 115(1), pages 285-304, February.
  11. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, vol. 48(1), pages 133-153, February.
  12. Flavio Toxvaerd & Chryssi Giannitsarou, 2004. "Recursive global games," Money Macro and Finance (MMF) Research Group Conference 2003 104, Money Macro and Finance Research Group.
  13. Corsetti, Giancarlo & Guimarães, Bernardo & Roubini, Nouriel, 2004. "International Lending of Last Resort and Moral Hazard: A Model of the IMF's Catalytic Finance," CEPR Discussion Papers 4383, C.E.P.R. Discussion Papers.
  14. Stephen Morris & Hyun Song Shin, 2001. "Rethinking Multiple Equilibria in Macroeconomic Modeling," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 139-182 National Bureau of Economic Research, Inc.
  15. Amil Dasgupta, 2002. "Coordination, Learning, and Delay," FMG Discussion Papers, Financial Markets Group dp435, Financial Markets Group.
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Cited by:
  1. Jakub Steiner, 2006. "Coordination of Mobile Labor," ESE Discussion Papers 152, Edinburgh School of Economics, University of Edinburgh.
  2. Iván Werning & George-Marios Angeletos, 2006. "Crises and Prices: Information Aggregation, Multiplicity, and Volatility," American Economic Review, American Economic Association, vol. 96(5), pages 1720-1736, December.
  3. Christian Hellwig, 2004. "Self-Fulfilling Currency Crises: The Role of Interest Rates (A.E.R., December 2006)," UCLA Economics Online Papers 338, UCLA Department of Economics.
  4. Christian Hellwig & Arijit Mukherji & Aleh Tsyvinski, 2005. "Self-Fulfilling Currency Crises: The Role of Interest Rates," NBER Working Papers 11191, National Bureau of Economic Research, Inc.
  5. Stephen Morris & Hyun Song Shin, 2006. "Endogenous Public Signals and Coordination," Levine's Bibliography 122247000000001309, UCLA Department of Economics.

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