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Devaluation without common knowledge

Author

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  • Celine Rochon

Abstract

In an economy with a fixed exchange rate regime that suffers a random adverse shock, we study the strategies of imperfectly and sequentially informed speculators that may trigger an endogenous devaluation before it occurs exogenously. The game played by the speculators has a unique symmetric Nash equilibrium which is a strongly rational expectation equilibrium in the set of all strategies with delay. Uncertainty about the extent to which the Central Bank is ready to defend the peg extends the ex ante mean delay between the exogenous shock and the devaluation. We determine endogenously the rate of devaluation.

Suggested Citation

  • Celine Rochon, 2006. "Devaluation without common knowledge," Economics Series Working Papers 2006-FE-03, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:2006-fe-03
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    Citations

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    Cited by:

    1. Feltenstein, Andrew & Rochon, Céline, 2009. "Can good events lead to bad outcomes? Endogenous banking crises and fiscal policy responses," Journal of Asian Economics, Elsevier, vol. 20(4), pages 396-409, September.
    2. Cheung, Yin-Wong & Friedman, Daniel, 2009. "Speculative attacks: A laboratory study in continuous time," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 1064-1082, October.
    3. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126.
    4. Broner, Fernando A., 2008. "Discrete devaluations and multiple equilibria in a first generation model of currency crises," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 592-605, April.
    5. Li, Mei & Milne, Frank, 2014. "The role of a large trader in a dynamic currency attack model," Journal of Financial Intermediation, Elsevier, vol. 23(4), pages 590-620.
    6. Gara Minguez-Afonso, 2007. "Imperfect Common Knowledge in First-Generation Models of Currency Crises," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 81-112, March.
    7. Mei Li & Frank Milne, 2007. "The Role Of Large Players In A Dynamic Currency Attack Game," Working Paper 1148, Economics Department, Queen's University.
    8. Mei Li & Frank Milne, 2010. "A Large Trader in Bubbles and Crashes: an Application to Currency Attacks," Working Papers 1004, University of Guelph, Department of Economics and Finance.

    More about this item

    Keywords

    Currency crises; Fixed exchange rate regime; Speculation; Endogenous devaluation; Imperfect information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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