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Risk and wealth in a model of self-fulfilling currency attacks

  • Guimaraes, Bernardo
  • Morris, Stephen

We analyze the effect of risk aversion, wealth and portfolios on the behavior of investors in a global game model of currency crises with continuous action choices. The model generates a rich set of striking theoretical predictions. For example, risk aversion makes currency crises significantly less likely; increased wealth makes crises more likely; and foreign direct investment (illiquid investments in the target currency) make crises more likely. Our results extend linearly to a heterogeneous agent population.

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

Volume (Year): 54 (2007)
Issue (Month): 8 (November)
Pages: 2205-2230

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Handle: RePEc:eee:moneco:v:54:y:2007:i:8:p:2205-2230
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  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.
  2. Kraay, Aart, 2000. "Do high interest rates defend currencies during speculative attacks ?," Policy Research Working Paper Series 2267, The World Bank.
  3. Mathevet, Laurent, . "A contraction principle for finite global games," Working Papers 1243, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Broner, Fernando A. & Gaston Gelos, R. & Reinhart, Carmen M., 2006. "When in peril, retrench: Testing the portfolio channel of contagion," Journal of International Economics, Elsevier, vol. 69(1), pages 203-230, June.
  5. Carlsson, H. & Van Damme, E., 1990. "Global Games And Equilibrium Selection," Papers 9052, Tilburg - Center for Economic Research.
  6. Bernardo Guimaraes & Stephen Morris, 2005. "Risk and Wealth in a Model of Self-Fulfilling Currency Attacks," Levine's Bibliography 122247000000000790, UCLA Department of Economics.
  7. repec:tpr:qjecon:v:115:y:2000:i:1:p:285-304 is not listed on IDEAS
  8. Christophe Chamley, 2003. "Dynamic Speculative Attacks," American Economic Review, American Economic Association, vol. 93(3), pages 603-621, June.
  9. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2005. "Signaling in a Global Game: Coordination and Policy Traps," Discussion Papers 1400, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Aleh Tsyvinski & Arijit Mukherji & Christian Hellwig, 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, American Economic Association, vol. 96(5), pages 1769-1787, December.
  11. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  12. Hyun Song Shin & Stephen Morris, 2001. "Coordination Risk and the Price of Debt," FMG Discussion Papers dp373, Financial Markets Group.
  13. Dasgupta, Amil, 2007. "Coordination and delay in global games," Journal of Economic Theory, Elsevier, vol. 134(1), pages 195-225, May.
  14. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2003. "Coordination and Policy Traps," NBER Working Papers 9767, National Bureau of Economic Research, Inc.
  15. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275, Cowles Foundation for Research in Economics, Yale University.
  16. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Hyun Song Shin, 2004. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 87-113, 01.
  17. Ivan Werning & George-Marios Angeletos, 2005. "Crises and Prices: Information Aggregation, Multiplicity and Volatility," 2005 Meeting Papers 284, Society for Economic Dynamics.
  18. Frankel, David M. & Morris, Stephen & Pauzner, Ady, 2003. "Equilibrium Selection in Global Games with Strategic Complementarities," Staff General Research Papers 11920, Iowa State University, Department of Economics.
  19. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
  20. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers.
  21. Goldstein, Itay & Pauzner, Ady, 2004. "Contagion of self-fulfilling financial crises due to diversification of investment portfolios," Journal of Economic Theory, Elsevier, vol. 119(1), pages 151-183, November.
  22. Frankel, David M. & Pauzner, Ady, 2000. "Resolving Indeterminacy in Dynamic Settings: The Role of Shocks," Staff General Research Papers 11924, Iowa State University, Department of Economics.
  23. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407 National Bureau of Economic Research, Inc.
  24. Nikola A. Tarashev, 2003. "Currency Crises and the Informational Role of Interest Rates," BIS Working Papers 135, Bank for International Settlements.
  25. Taimur Baig & Ilan Goldfajn, 2000. "The Russian default and the contagion to Brazil," Textos para discussão 420, Department of Economics PUC-Rio (Brazil).
  26. 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.
  27. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, 08.
  28. Guimaraes, Bernardo, 2006. "Dynamics of currency crises with asset market frictions," Journal of International Economics, Elsevier, vol. 68(1), pages 141-158, January.
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