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Recurrent crises in global games

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  • Frankel, David M.

Abstract

Global games have unique equilibria in which aggregate behavior changes sharply when an underlying random fundamental crosses some threshold. This property relies on the existence of dominance regions: all players have a highest and lowest action that, for some fundamentals, is strictly dominant. But if the fundamental follows a random walk, it eventually spends nearly all of its time in these regions: crises gradually disappear. We obtain recurring crises by adding a single large player who lacks dominance regions. We also show that in order to obtain recurring crises, one must either relax dominance regions or restrict to fundamentals that continually return to or cross over a fixed region.

Suggested Citation

  • Frankel, David M., 2012. "Recurrent crises in global games," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 309-321.
  • Handle: RePEc:eee:mateco:v:48:y:2012:i:5:p:309-321 DOI: 10.1016/j.jmateco.2012.07.003
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    References listed on IDEAS

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    Cited by:

    1. Drozd, Lukasz A. & Serrano-Padial, Ricardo, 2017. "Credit Enforcement Cycles," Working Papers 17-27, Federal Reserve Bank of Philadelphia.
    2. Frankel, David M., 2014. "Optimal Insurance for Small Stakeholders," Staff General Research Papers Archive 37551, Iowa State University, Department of Economics.
    3. Frankel, David M., 2015. "Insuring Customers of a Unionized Firm Against Loss of Network Benefits," Staff General Research Papers Archive 38580, Iowa State University, Department of Economics.

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