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A Theory of the Onset of Currency Attacks

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  • Hyun Song Shin
  • Stephen Morris

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 fragmented 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 attack 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 University of Oxford, Department of Economics in its series Economics Series Working Papers with number 1998-W20.

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Date of creation: 01 Sep 1998
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Handle: RePEc:oxf:wpaper:1998-w20

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Keywords: Currency crisis; common knowledge;

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  1. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  2. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
  3. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  4. 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.
  5. Van Damme, E., 1991. "Equilibrium Selection in 2 x 2 Games," Papers, Tilburg - Center for Economic Research 9108, Tilburg - Center for Economic Research.
  6. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, Econometric Society, vol. 61(5), pages 989-1018, September.
  7. 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).
  8. 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.
  9. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, American Economic Association, vol. 76(1), pages 72-81, March.
  10. Edison, Hali J & Luangaram, Pongsak & Miller, Marcus, 1998. "Asset Bubbles, Domino Effects and 'Lifeboats': Elements of the East Asian Crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1866, C.E.P.R. Discussion Papers.
  11. Stephen Morris & Hyun Song Shin, . "Approximate Common Knowledge and Co-ordination: Recent Lessons from Game Theory," Penn CARESS Working Papers, Penn Economics Department 72042421d029130510780dde2, Penn Economics Department.
  12. 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.
  13. 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.
  14. 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.
  15. Morris, Stephen & Rob, Rafael & Shin, Hyun Song, 1995. "Dominance and Belief Potential," Econometrica, Econometric Society, Econometric Society, vol. 63(1), pages 145-57, January.
  16. Robert P. Flood & Peter M. Garber, 1980. "Gold Monetization and Gold Discipline," NBER Working Papers 0544, National Bureau of Economic Research, Inc.
  17. Shin Hyun Song, 1993. "Logical Structure of Common Knowledge," Journal of Economic Theory, Elsevier, Elsevier, vol. 60(1), pages 1-13, June.
  18. 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.).
  19. 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.
  20. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  21. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, Elsevier, vol. 1(2), pages 170-190, June.
  22. 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.
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