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

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Author Info
Fernando Broner

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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 attacks should be predictable and lead to 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, which 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 delays the attack on the currency past the point at which the shadow exchange rate equals the peg, giving rise to unpredictable and discrete devaluations.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 839.

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Date of creation: Nov 2003
Date of revision: Jan 2007
Handle: RePEc:upf:upfgen:839

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Keywords: Currency crises first generation models private information discrete devaluations multiple equilibria

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Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Flood, Robert P & Garber, Peter M, 1984. "Gold Monetization and Gold Discipline," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 90-107, February. [Downloadable!] (restricted)
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  3. V. V. Chari & Patrick J. Kehoe, 2003. "Financial Crises as Herds: Overturning the Critiques," NBER Working Papers 9658, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January. [Downloadable!] (restricted)
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  5. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August. [Downloadable!] (restricted)
  6. Christophe Chamley, 2003. "Dynamic Speculative Attacks," American Economic Review, American Economic Association, vol. 93(3), pages 603-621, June. [Downloadable!] (restricted)
  7. Burnside, A Craig & Eichenbaum, Martin & Rebelo, Sérgio, 1998. "Prospective Deficits and the Asian Currency Crises," CEPR Discussion Papers 2015, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Celine Rochon, 2006. "Devaluation without common knowledge," OFRC Working Papers Series 2006fe03, Oxford Financial Research Centre. [Downloadable!]
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  10. Peter M. Garber, 1998. "Derivatives in International Capital Flows," NBER Working Papers 6623, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Amartya Lahiri & Carlos A. Vegh, 2003. "Delaying the Inevitable: Interest Rate Defense and Balance of Payments Crises," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 404-424, April. [Downloadable!] (restricted)
  16. Rochon, Celine, 2006. "Devaluation without common knowledge," Journal of International Economics, Elsevier, vol. 70(2), pages 470-489, December. [Downloadable!] (restricted)
  17. Maurice Obstfeld, 1986. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. V. V. Chari & Patrick J. Kehoe, 2000. "Financial crises as herds," Working Papers 600, Federal Reserve Bank of Minneapolis.
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  20. V. V. Chari & Patrick J. Kehoe, 2003. "Hot Money," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1262-1292, December. [Downloadable!] (restricted)
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  22. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August. [Downloadable!] (restricted)
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  25. Fernando Broner, 1999. "On the Timing of Balance of Payments Crises: Disaggregated Information and Interest Rate Policy," Economics Working Papers 840, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2002. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bernardo Guimaraes, 2008. "Vulnerability of Currency Pegs: Evidence from Brazil," CEP Discussion Papers dp0871, Centre for Economic Performance, LSE. [Downloadable!]
  2. 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. [Downloadable!]
    Other versions:
  3. Guimarães, Bernardo, 2007. "Currency Crisis Triggers: Sunspots or Thresholds?," CEPR Discussion Papers 6487, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Celine Rochon, 2006. "Devaluation without common knowledge," OFRC Working Papers Series 2006fe03, Oxford Financial Research Centre. [Downloadable!]
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