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Coordination Failures and Asset Prices

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Author Info

  • Aleh Tsyvinski
  • Christian Hellwig
  • Arihit Mukherji

Abstract

We augment a standard global coordination game along the lines of Morris and Shin (1998) by an asset market where prices are determined in a noisy Rational Expectations Equilibrium. We study the implications of information aggregation through prices for equilibrium selection arguments in global coordination games, first in a model where the asset market is separate from the coordination game but asset payoffs conditioned on the same fundamentals, then in a stylized currency crises model, where the asset market itself gives rise to the coordination problem. Information aggregation overturns the global games argument for equilibrium uniqueness, and implies that there may be multiple equilibria, in particular when private information is sufficiently precise. This conclusion also arises robustly within our currency crises model, provided that we take into account the role of domestic interest rates in determining the ultimate coordination outcome, along the lines suggested by Obstfeld (1986 and 1996). Despite multiplicity, the global games approach yields novel insights: All equilibria are characterized by discrete changes in domestic interest rates and the probability of devaluation in response to small changes in underlying fundamentals.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 72.

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Date of creation: 2004
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Handle: RePEc:red:sed004:72

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Related research

Keywords: heterogeneous information; transparency; dynamic strategic complementarities;

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Cited by:
  1. Bruno, Randolph Luca, 2008. "Rule of Law, Institutional Quality and Information," IZA Discussion Papers 3497, Institute for the Study of Labor (IZA).
  2. Ivan Werning & George-Marios Angeletos, 2005. "Crises and Prices: Information Aggregation, Multiplicity and Volatility," 2005 Meeting Papers 284, Society for Economic Dynamics.
  3. Jean-Charles Rochet & Xavier Vives, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," FMG Discussion Papers dp408, Financial Markets Group.
  4. Stephen Morris & Hyun Song Shin, 2006. "Endogenous Public Signals and Coordination," Levine's Bibliography 122247000000001309, UCLA Department of Economics.
  5. Randolph Luca Bruno, 2006. "Unique Equilibrium in a Model of Rule of Law," LEM Papers Series 2006/16, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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