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Learning and Complementarities in Speculative Attacks

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  • Itay Goldstein
  • Emre Ozdenoren
  • Kathy Yuan

Abstract

We study a model where the aggregate trading of currency speculators reveals new information to the central bank and affects its policy decision. We show that the learning process gives rise to coordination motives among speculators leading to large currency attacks and introducing non-fundamental volatility into exchange rates and policy decisions. We show that the central bank can improve the ex ante effectiveness of its policy by committing to put a lower weight ex post on the information from the market, and that transparency may either increase or decrease the effectiveness of learning from the market, depending on how it is implemented. Copyright 2011, Oxford University Press.

Suggested Citation

  • Itay Goldstein & Emre Ozdenoren & Kathy Yuan, 2011. "Learning and Complementarities in Speculative Attacks," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 263-292.
  • Handle: RePEc:oup:restud:v:78:y:2011:i:1:p:263-292
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    File URL: http://hdl.handle.net/10.1093/restud/rdq017
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    Cited by:

    1. Romain Baeriswyl & Camille Cornand & Bruno Ziliotto, 2016. "Observing and shaping the market: the dilemma of central banks," Working Papers 1623, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    2. Mathevet, Laurent & Steiner, Jakub, 2013. "Tractable dynamic global games and applications," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2583-2619.
    3. Goldstein, Itay & Razin, Assaf, 2015. "Three Branches of Theories of Financial Crises," Foundations and Trends(R) in Finance, now publishers, vol. 10(2), pages 113-180, 30.
    4. Szkup, Michal & Trevino, Isabel, 2015. "Information acquisition in global games of regime change," Journal of Economic Theory, Elsevier, vol. 160(C), pages 387-428.
    5. Kováč, Eugen & Steiner, Jakub, 2013. "Reversibility in dynamic coordination problems," Games and Economic Behavior, Elsevier, vol. 77(1), pages 298-320.
    6. Laurent Mathevet & Jakub Steiner, 2012. "Sand in the Wheels: A Dynamic Global-Game Approach," CERGE-EI Working Papers wp459, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    7. Manzano, Carolina & Vives, Xavier, 2011. "Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 346-369.
    8. Lin, Tse-chun & Liu, Qi & Sun, Bo, 2015. "Contracting with Feedback," International Finance Discussion Papers 1143, Board of Governors of the Federal Reserve System (U.S.).
    9. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2013. "Trading frenzies and their impact on real investment," Journal of Financial Economics, Elsevier, vol. 109(2), pages 566-582.
    10. Boleslavsky, Raphael & Kelly, David L. & Taylor, Curtis R., 2017. "Selloffs, bailouts, and feedback: Can asset markets inform policy?," Journal of Economic Theory, Elsevier, vol. 169(C), pages 294-343.
    11. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
    12. Dasgupta, Amil & Steiner, Jakub & Stewart, Colin, 2012. "Dynamic coordination with individual learning," Games and Economic Behavior, Elsevier, vol. 74(1), pages 83-101.
    13. Michael Sockin & Wei Xiong, 2013. "Informational Frictions and Commodity Markets," NBER Working Papers 18906, National Bureau of Economic Research, Inc.
    14. Camille Cornand & Romain Baeriswyl & Bruno Ziliotto, 2017. "Observing and shaping the market: the dilemma of central banks," Working Papers hal-01644269, HAL.
    15. repec:eee:macchp:v2-1065 is not listed on IDEAS

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