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Devaluation without common knowledge

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  • Celine Rochon
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    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. Forthcoming in the Journal of International Economics

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    Bibliographic Info

    Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2006fe03.

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    Date of creation: 2006
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    Handle: RePEc:sbs:wpsefe:2006fe03

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    Cited by:
    1. 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.
    2. 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.
    3. Céline Rochon & Andrew Feltenstein, 2006. "Can Good Events Lead to Bad Outcomes? Endogenous Banking Crises and Fiscal Policy Responses," IMF Working Papers 06/263, International Monetary Fund.
    4. Mei Li & Frank Milne, 2007. "The Role of Large Players in a Dynamic Currency Attack Game," Working Papers 1148, Queen's University, Department of Economics.

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