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Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises

  • Fernando A Broner

The rst generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency attacks should be predictable and lead to small devaluations. This paper shows that these features of rst generation models are not robust to the inclusion of private information. In particular, this paper analyzes a generalization of the Krugman-Flood-Garber (KFG) model, which relaxes the assumption that all consumers are perfectly informed about the level of fundamentals. In this environment, the KFG equilibrium of zero devaluation is only one of many possible equilibria. In all the other equilibria, the lack of perfect information delays the attack on the currency past the point at which the shadow exchange rate equals the peg, giving rise to unpredictable and discrete devaluations.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 309.

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Date of creation: Aug 2006
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Handle: RePEc:bge:wpaper:309
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  12. Gr da, Cormac & White, Eugene N., 2003. "The Panics of 1854 and 1857: A View from the Emigrant Industrial Savings Bank," The Journal of Economic History, Cambridge University Press, vol. 63(01), pages 213-240, March.
  13. Dilip Abreu & Markus K. Brunnermeier, 2002. "Bubbles and crashes," LSE Research Online Documents on Economics 24905, London School of Economics and Political Science, LSE Library.
  14. V. V. Chari & Patrick J. Kehoe, 2003. "Hot Money," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1262-1292, December.
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  18. 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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  20. Fernando A. Broner, 2004. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," Working Papers 186, Barcelona Graduate School of Economics.
  21. Marina Halac & Sergio L. Schmukler, 2004. "Distributional Effects of Crises: The Financial Channel," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
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  28. Amartya Lahiri & Carlos A. Vegh, 2003. "Delaying the Inevitable: Interest Rate Defense and Balance of Payments Crises," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 404-424, April.
  29. Cavallari, Lilia & Corsetti, Giancarlo, 2000. "Shadow rates and multiple equilibria in the theory of currency crises," Journal of International Economics, Elsevier, vol. 51(2), pages 275-286, August.
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  31. Fernando Broner, 1999. "On the timing of balance of payments crises: Disaggregated information and interest rate policy," Economics Working Papers 840, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2002.
  32. V. V. Chari & Patrick J. Kehoe, 2000. "Financial crises as herds," Working Papers 600, Federal Reserve Bank of Minneapolis.
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