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Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises

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  • Fernando A. Broner

Abstract

The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency crises should be predictable and associated with small devaluations. This paper shows that these features of first generation models are not robust to the inclusion of private information. In particular, this paper analyzes a generalization of the Krugman-Flood-Garber (KFG) model, that relaxes the assumption that all consumers are perfectly informed about the level of fundamentals. In this environment, the KFG equilibrium of zero devaluation is only one of many possible equilibria. In all the other equilibria, the lack of perfect information makes the peg last past the point at which the shadow exchange rate equals it, giving rise to unpredictable and discrete devaluations

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 264.

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Date of creation: 2004
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Handle: RePEc:red:sed004:264

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Keywords: Currency crises; ¯rst generation models; timing; private information; learning;

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  6. Broner, Fernando A, 2006. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5876, C.E.P.R. Discussion Papers.
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  23. George-Marios Angeletos & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1497, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  24. Rochon, Celine, 2006. "Devaluation without common knowledge," Journal of International Economics, Elsevier, Elsevier, vol. 70(2), pages 470-489, December.
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Cited by:
  1. Rochon, Celine, 2006. "Devaluation without common knowledge," Journal of International Economics, Elsevier, Elsevier, vol. 70(2), pages 470-489, December.
  2. George-Marios Angeletos & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1497, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Gara Minguez-Afonso, 2007. "Imperfect Common Knowledge in First-Generation Models of Currency Crises," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 81-112, March.
  4. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2010. "Learning and Complementarities: Implications for Speculative Attacks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7651, C.E.P.R. Discussion Papers.
  5. Guimaraes, Bernardo, 2006. "Dynamics of currency crises with asset market frictions," Journal of International Economics, Elsevier, Elsevier, vol. 68(1), pages 141-158, January.
  6. Fernando Broner, 2003. "Discrete devaluations and multiple equilibria in a first generation model of currency crises," Economics Working Papers 839, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2007.
  7. Bernardo Guimaraes, 2005. "Market Expectations and Currency Crises: Theory and Empirics," 2005 Meeting Papers, Society for Economic Dynamics 174, Society for Economic Dynamics.
  8. Bernardo Guimaraes, 2008. "Vulnerability of currency pegs: evidence from Brazil," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 4909, London School of Economics and Political Science, LSE Library.
  9. Tijmen Daniëls & Henk Jager & Franc Klaassen, 2009. "Defending Against Speculative Attacks," SFB 649 Discussion Papers SFB649DP2009-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  10. Pablo Kurlat, . "Optimal Stopping in a Model of Speculative Attacks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  11. Guimarães, Bernardo, 2007. "Currency Crisis Triggers: Sunspots or Thresholds?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6487, C.E.P.R. Discussion Papers.
  12. Chong Huang, 2011. "Defending Against Speculative Attacks: Reputation, Learning, and Coordination," PIER Working Paper Archive 11-039, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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