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Speculative attacks: unique equilibrium and transparency

  • Heinemann, Frank
  • Illing, Gerhard

Models with multiple equilibria are a popular way to explain currency attacks. Morris and Shin (1998) have shown that, in the context of those models, unique equilibria may prevail once noisy private information is introduced. In this paper, we apply the method of Morris and Shin to a broader class of probability distributions and show-using the technique of iterated elimination of dominated strategies-that their results continue to hold, even if we allow for sunspots and individual uncertainty about strategic behavior of other agents. We provide a clear exposition of the logic of this model and we analyze the impact of transparency on the probability of a speculative attack. For the case of uniform distribution of noisy signals, we show that increased transparency of government policy reduces the likelihood of attacks.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 58 (2002)
Issue (Month): 2 (December)
Pages: 429-450

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Handle: RePEc:eee:inecon:v:58:y:2002:i:2:p:429-450
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  1. Stephen Morris & Hyun Song Shin, 2001. "Coordination risk and the price of debt," LSE Research Online Documents on Economics 25046, London School of Economics and Political Science, LSE Library.
  2. AUMANN, Robert J., . "Subjectivity and correlation in randomized strategies," CORE Discussion Papers RP -167, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Kyoji Fukao, 2003. "Coordination Failures under Incomplete Information and Global Games," Discussion papers 03006, Research Institute of Economy, Trade and Industry (RIETI).
  4. Frankel, David M. & Morris, Stephen & Pauzner, Ady, 2003. "Equilibrium selection in global games with strategic complementarities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 1-44, January.
  5. Carlsson, H. & van Damme, E.E.C., 1993. "Global games and equilibrium selection," Other publications TiSEM 49a54f00-dcec-4fc1-9488-4, Tilburg University, School of Economics and Management.
  6. Bernheim, B Douglas, 1984. "Rationalizable Strategic Behavior," Econometrica, Econometric Society, vol. 52(4), pages 1007-28, July.
  7. Frank Heinemann, 2000. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 316-318, March.
  8. Faust, J. & Svensson, L.E.O., 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," Papers 636, Stockholm - International Economic Studies.
  9. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  10. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
  11. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  12. Guesnerie, R., 1989. "An Exploration of the Eductive Justifications of the Rational Expectations Hypotbesis," DELTA Working Papers 89-24, DELTA (Ecole normale supérieure).
  13. Adam Brandenburger, 1992. "Knowledge and Equilibrium in Games," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 83-101, Fall.
  14. Frank Heinemann, 1997. "Rationalizable expectations and sunspot equilibria in an overlapping-generations economy," Journal of Economics, Springer, vol. 65(3), pages 257-277, October.
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