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A Theory of the Onset of Currency Attacks

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  • Morris, S.
  • Shin, H.S.

Abstract

The swiftness and devastating impact of recent financial crises have taken many market participants by surprise, and pose challenges for economists seeking a theory of the onset of a crisis. We propose such a theory based on two features. The actions of diverse economic actors which undermine the currency are mutually reinforcing, while the fragment nature of the media create small disparities in their information. In such circumstances, the beliefs of market participants can be tracked in the same way as the economic fundamentals, and an attach is triggered when the economic fundamentals deteriorate sufficiently to fall below the minimum level of market confidence necessary to support the currency. We give a characterization of such a minimum level of confidence.

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Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 149.

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Length: 28 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:nuf:econwp:149

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Web page: http://www.nuff.ox.ac.uk/economics/

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Keywords: CURRENCIES ; MONETARY CRISIS;

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References

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  1. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, Elsevier, vol. 17(1-2), pages 1-13, August.
  2. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
  3. Kumar, Mohan & Moorthy, Uma & Perraudin, William, 2003. "Predicting emerging market currency crashes," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(4), pages 427-454, September.
  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. Atsushi Kajii & Stephen Morris, . ""The Robustness of Equilibria to Incomplete Information*''," CARESS Working Papres, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences 95-18, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  6. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, Elsevier, vol. 1(2), pages 170-190, June.
  7. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(4), pages 627-48, August.
  8. Carlsson, H. & Damme, E.E.C. van, 1991. "Equilibrium selection in stag hunt games," Discussion Paper, Tilburg University, Center for Economic Research 1991-70, Tilburg University, Center for Economic Research.
  9. Hali J. Edison & Pongsak Luangaram & Marcus Miller, 1998. "Asset bubbles, domino effects and 'lifeboats': elements of the East Asian crisis," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 606, Board of Governors of the Federal Reserve System (U.S.).
  10. Morris, Stephen & Rob, Rafael & Shin, Hyun Song, 1995. "Dominance and Belief Potential," Econometrica, Econometric Society, Econometric Society, vol. 63(1), pages 145-57, January.
  11. Stephen Morris & Hyun Song Shin, . ""Approximate Common Knowledge and Co-ordination: Recent Lessons from Game Theory''," CARESS Working Papres, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences 96-07, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  12. Rubinstein, Ariel, 1989. "The Electronic Mail Game: Strategic Behavior under "Almost Common Knowledge."," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 385-91, June.
  13. Robert P. Flood & Peter M. Garber, 1981. "Gold monetization and gold discipline," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 190, Board of Governors of the Federal Reserve System (U.S.).
  14. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  15. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  16. Werlang, Sérgio Ribeiro da Costa, 1988. "Common knowledge," Economics Working Papers (Ensaios Economicos da EPGE) 118, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  17. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1687, C.E.P.R. Discussion Papers.
  18. Van Damme, E., 1991. "Equilibrium Selection in 2 x 2 Games," Papers, Tilburg - Center for Economic Research 9108, Tilburg - Center for Economic Research.
  19. Maurice Obstfeld, 1984. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
  20. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 81, Board of Governors of the Federal Reserve System (U.S.).
  21. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  22. Shin Hyun Song, 1993. "Logical Structure of Common Knowledge," Journal of Economic Theory, Elsevier, Elsevier, vol. 60(1), pages 1-13, June.
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