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Self-Fulfilling Currency Crises: The Role of Interest Rates

  • Aleh Tsyvinski
  • Arijit Mukherji
  • Christian Hellwig

We develop a model of currency crises, in which traders are heterogeneously informed, and interest rates are endogenously determined in a noisy rational expectations equilibrium. In our model, multiple equilibria result from distinct roles an interest rate plays in determining domestic asset market allocations and the devaluation outcome. Except for special cases, this finding is not affected by the introduction of noisy private signals. We conclude that the global games results on equilibrium uniqueness do not apply to market-based models of currency crises. (JEL D84, E43, F32)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.96.5.1769
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 96 (2006)
Issue (Month): 5 (December)
Pages: 1769-1787

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Handle: RePEc:aea:aecrev:v:96:y:2006:i:5:p:1769-1787
Note: DOI: 10.1257/aer.96.5.1769
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