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Expectations and information in second generation currency crises models

Author

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  • Massimo Sbracia

    () (Banca d�Italia, Research Department)

  • Andrea Zaghini

    () (Banca d�Italia, Research Department)

Abstract

We explore the role of expectations in second generation currency crisis models, proving that sudden shifts in speculators' beliefs can trigger currency devaluations, even without any sizable worsening in the fundamentals. In our incomplete information game, mean-preserving changes in speculators� expectations may drive agents to a unique equilibrium with a self-fulfilling attack. In particular, our model supports the thesis that uncertainty matters, since a sufficiently large increase in speculators' uncertainty over the fundamentals is likely to trigger a currency crisis. Following a recent line of research, we also compare the results of private and public information models and find the following paradox; if speculators have private information, the fact that the state of fundamentals is publicly revealed turns out to be more advantageous to the government when fundamentals are bad.

Suggested Citation

  • Massimo Sbracia & Andrea Zaghini, 2000. "Expectations and information in second generation currency crises models," Temi di discussione (Economic working papers) 391, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_391_00
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Camille Cornand, 2006. "Speculative Attacks and Informational Structure: an Experimental Study," Review of International Economics, Wiley Blackwell, pages 797-817.
    2. Allsopp, Louise, 2002. "Common knowledge and the value of defending a fixed exchange rate--an explanation of a currency crisis," Journal of Macroeconomics, Elsevier, vol. 24(1), pages 67-79, March.
    3. Luca Dedola & Eugenio Gaiotti & Luca Silipo, 2001. "Money demand in the euro area: do national differences matter?," Temi di discussione (Economic working papers) 405, Bank of Italy, Economic Research and International Relations Area.
    4. Prati, Alessandro & Sbracia, Massimo, 2010. "Uncertainty and currency crises: Evidence from survey data," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 668-681, September.
    5. Jean-Pierre Allegret & Camille Cornand, 2006. "The pros and cons of higher transparency: the case of speculative attacks," Recherches économiques de Louvain, De Boeck Université, pages 215-246.
    6. Tomasz Kamil Michalski & Guillaume Stoltz, 2010. "Do countries falsify economic data strategically? Some evidence that they do," Post-Print hal-00543490, HAL.
    7. Meixing Dai, 2009. "Public debt and currency crisis: how central bank opacity can make things bad?," Economics Bulletin, AccessEcon, vol. 29(1), pages 190-198.
    8. Sanne Zwart, 2005. "Liquidity runs with endogenous information acquisition," Economics Working Papers ECO2005/18, European University Institute.
    9. Chan, Kenneth S. & Chiu, Y. Stephen, 2002. "The role of (non-)transparency in a currency crisis model," European Economic Review, Elsevier, vol. 46(2), pages 397-416, February.
    10. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, September.
    11. Lili Zhu & Jiawen Yang, 2010. "Psychic Distance in the Eight-year Crisis: An Empirical Study," Chapters,in: Handbook of Behavioral Finance, chapter 7 Edward Elgar Publishing.
    12. Ruiz-Porras, Antonio, 2006. "Información privilegiada, administración de riesgos y utilidades esperadas: Una aplicación de los juegos de señalización al estudio de crisis cambiarias," MPRA Paper 1441, University Library of Munich, Germany.
    13. Tomasz Michalski & Gilles Stoltz, 2013. "Do Countries Falsify Economic Data Strategically? Some Evidence That They Might," The Review of Economics and Statistics, MIT Press, pages 591-616.
    14. Bannier, Christina E., 2003. "Privacy or Publicity - Who Drives the Wheel?," CFS Working Paper Series 2003/29, Center for Financial Studies (CFS).
    15. Maurício Yoshinori Une & Marcelo Savino Portugal, 2005. "Fear of disruption: a model of Markov-switching regimes for the Brazilian country risk conditional volatility," Econometrics 0509005, EconWPA.
    16. Sander, Harald & Kleimeier, Stefanie, 2003. "Contagion and causality: an empirical investigation of four Asian crisis episodes," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(2), pages 171-186, April.
    17. David Gray, 2014. "Central European foreign exchange markets: a cross-spectral analysis of the 2007 financial crisis," The European Journal of Finance, Taylor & Francis Journals, vol. 20(6), pages 550-567, June.
    18. Tai-kuang Ho & Ming-yen Wu, 2012. "Third-person Effect and Financial Contagion in the Context of a Global Game," Open Economies Review, Springer, vol. 23(5), pages 823-846, November.
    19. M. Sbracia & Alessandro Prati, 2002. "Currency Crises and Uncertainty About Fundamentals," IMF Working Papers 02/3, International Monetary Fund.
    20. Christina E. Bannier, 2003. "Privacy or Publicity - Who Drives the Wheel?," Game Theory and Information 0309006, EconWPA.
    21. MARAIS Elise, 2004. "La contagion financi`ere : une ´etude empirique sur les causalités lors de la crise asiatique," International Finance 0404003, EconWPA.

    More about this item

    Keywords

    currency crises; speculative attack; multiple equilibria;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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