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Currency Crises and the Informational Role of Interest Rates

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  • Nikola A. Tarashev

Abstract

In the late 1990s, Morris and Shin proposed a new theoretical framework of financial crises, which generalised traditional models of strategic complementarity and self-fulfilling beliefs by incorporating idiosyncratic uncertainty about the state. The innovative feature of their framework is expressed by its capacity to account for seemingly unwarranted speculative attacks under equilibrium uniqueness and to thus place policy analysis on a firm footing. The macroeconomic implications of the framework have been questioned, however, because it ignores the issue of information aggregation via market prices. Motivated by such criticism, this paper modifies the Morris-Shin setup by allowing prices to adjust freely to market conditions. It is then shown that all of the appealing characteristics of that setup are preserved even when public information has an endogenously disseminated component. Moreover, the prevailing weak form of strategic complementarity, in conjunction with heterogeneity of private agents' information sets, leads to a less restrictive prerequisite for equilibrium uniqueness. Further, the paper's model delivers new policy implications and suggests a change in the approach of structural currency crisis empirical analysis.

Suggested Citation

  • Nikola A. Tarashev, 2003. "Currency Crises and the Informational Role of Interest Rates," BIS Working Papers 135, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:135
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    References listed on IDEAS

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    1. Sanford Grossman, 1989. "The Informational Role of Prices," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572141, January.
    2. Dasgupta, Amil, 2002. "Coordination, learning, and delay," LSE Research Online Documents on Economics 24955, London School of Economics and Political Science, LSE Library.
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    Citations

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    Cited by:

    1. 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.
    2. Jón Daníelsson & Francisco Peñaranda, 2011. "On The Impact Of Fundamentals, Liquidity, And Coordination On Market Stability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(3), pages 621-638, August.
    3. Stephen Morris & Hyun Song Shin, 2006. "Endogenous Public Signals and Coordination," Levine's Bibliography 122247000000001309, UCLA Department of Economics.
    4. Christian Hellwig, 2004. "Self-Fulfilling Currency Crises: The Role of Interest Rates (A.E.R., December 2006)," UCLA Economics Online Papers 338, UCLA Department of Economics.
    5. Bernardo Guimaraes & Stephen Morris, 2003. "Risk and Wealth in a Model of Self-fulfilling Currency Crises," Cowles Foundation Discussion Papers 1433, Cowles Foundation for Research in Economics, Yale University.
    6. Guimaraes, Bernardo & Morris, Stephen, 2007. "Risk and wealth in a model of self-fulfilling currency attacks," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2205-2230, November.
    7. Sanne Zwart, 2005. "Liquidity runs with endogenous information acquisition," Economics Working Papers ECO2005/18, European University Institute.

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    Keywords

    financial crises; currency crises;

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