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Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks

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  • George-Marios Angeletos
  • Alessandro Pavan

Abstract

Global games of regime change–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 take actions in many periods and to learn about the underlying fundamentals over time. We first provide a simple recursive algorithm for the characterization of monotone equilibria. We then show how the interaction of the knowledge that the regime survived past attacks with the arrival of information over time, or with changes in fundamentals, leads to interesting equilibrium properties. First, multiplicity may obtain under the same conditions on exogenous information that guarantee uniqueness in the static benchmark. Second, fundamentals may predict the eventual regime outcome but not the timing or the number of attacks. Finally, equilibrium dynamics can alternate between phases of tranquillity–where no attack is possible–and phases of distress–where a large attack can occur–even without changes in fundamentals.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1497.

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Date of creation: Jul 2007
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Handle: RePEc:nwu:cmsems:1497

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Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
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Web page: http://www.kellogg.northwestern.edu/research/math/
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Related research

Keywords: Global games; coordination; multiple equilibria; information dynamics; crises.;

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  1. Fernando A. Broner, 2004. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," 2004 Meeting Papers 264, Society for Economic Dynamics.
  2. Paul Heidhues & Nicolas Melissas, 2006. "Equilibria in a dynamic global game: the role of cohort effects," Economic Theory, Springer, vol. 28(3), pages 531-557, 08.
  3. Carlsson, H. & Damme, E.E.C. van, 1990. "Global games and equilibrium selection," Discussion Paper 1990-52, Tilburg University, Center for Economic Research.
  4. Chris Edmond, 2013. "Information Manipulation, Coordination, and Regime Change," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1422-1458.
  5. Flavio Toxvaerd & Chryssi Giannitsarou, 2004. "Recursive global games," Money Macro and Finance (MMF) Research Group Conference 2003 104, Money Macro and Finance Research Group.
  6. Christophe Chamley, 2003. "Dynamic Speculative Attacks," American Economic Review, American Economic Association, vol. 93(3), pages 603-621, June.
  7. Ivan Werning & George-Marios Angeletos, 2005. "Crises and Prices: Information Aggregation, Multiplicity and Volatility," 2005 Meeting Papers 284, Society for Economic Dynamics.
  8. David Frankel & Ady Pauzner, 2000. "Resolving Indeterminacy In Dynamic Settings: The Role Of Shocks," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 285-304, February.
  9. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2003. "Coordination and Policy Traps," NBER Working Papers 9767, National Bureau of Economic Research, Inc.
  10. Christophe Chamley, 1999. "Coordinating Regime Switches," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 869-905, August.
  11. Aleh Tsyvinski & Arijit Mukherji & Christian Hellwig, 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, American Economic Association, vol. 96(5), pages 1769-1787, December.
  12. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
  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. Hellwig, Christian, 2002. "Public Information, Private Information, and the Multiplicity of Equilibria in Coordination Games," Journal of Economic Theory, Elsevier, vol. 107(2), pages 191-222, December.
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