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On the Dynamics of Information, Coordination and Regime Change

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  • A. Pavan
  • G.M. Angeletos
  • C. Hellwig

Abstract

This paper examines how the dynamics of information influences the dynamics of coordination in an environment with strategic complementarities and heterogeneous expectations. We consider a simple dynamic global game of regime change, in which the status quo is abandoned when a sufficiently large fraction of agents attacks it. Applications include bank runs, currency crises, revolutions, and political reforms. We show that the occurrence of coordinated attacks and the timing of regime change depend, not only on the evolution of information, but also on arbitrary self-fulfilling expectations. Despite the indeterminacy in short-run dynamics, long-run outcomes are driven by fundamentals: There is a unique threshold below which regime change is inevitable in the long run. Moreover, all equilibrium paths are characterized by the succession of short phases of high risk of a crisis and long phases of tranquility, which may explain why phenomena such as speculative attacks and revolutions appear as spikes in economic or social activity.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 270.

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Date of creation: 2004
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Handle: RePEc:red:sed004:270

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Keywords: Coordination; Dynamics; Regime Change; Global Games;

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Cited by:
  1. Fernando A Broner, 2006. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," Working Papers 309, Barcelona Graduate School of Economics.

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