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Signaling in a Global Game: Coordination and Policy Traps

  • George-Marios Angeletos
  • Christian Hellwig
  • Alessandro Pavan

This paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs. While exogenous asymmetric information has been shown to select a unique equilibrium, we show that the endogenous information generated by policy interventions leads to multiple equilibria. The policy maker is thus trapped into a position in which self-fulfilling expectations dictate not only the coordination outcome but also the optimal policy. This result does not rely on the freedom to choose out-of-equilibrium beliefs, nor on the policy being a public signal; it may obtain even if the policy is observed with idiosyncratic noise.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 114 (2006)
Issue (Month): 3 (June)
Pages: 452-484

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Handle: RePEc:ucp:jpolec:v:114:y:2006:i:3:p:452-484
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