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Equilibrium Currency Crises: Are Multiple Equilibria Self-fulfilling or History Dependent?


  • Davies, Gareth
  • Vines, David


The viability of a fixed exchange rate system is shown to be state- or shock-dependent. We show, simply, Obstfeld's claim that there may be multiple equilibria - multiple shock values for which a regime switch becomes optimal. We distinguish between self-fulfilling and history-dependent crises. In the former, crises may occur due to a jump from one equilibrium to another, even for constant model parameters, including the government's cost of quitting the regime. In the latter, costly expectational adjustment implies that the country's history, embodied in its initial expectations, determines the relevant equilibrium and the likelihood of a crisis.

Suggested Citation

  • Davies, Gareth & Vines, David, 1995. "Equilibrium Currency Crises: Are Multiple Equilibria Self-fulfilling or History Dependent?," CEPR Discussion Papers 1239, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1239

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    References listed on IDEAS

    1. John M. Abowd & Bruno Crepon & Francis Kramarz & Alain Trognon, 1995. "A La Recherche des Moments Perdus: Covariance Models for Unbalanced Panels with Endogenous Death," NBER Technical Working Papers 0180, National Bureau of Economic Research, Inc.
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    3. Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 551-575.
    4. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
    5. Horst Entorf & Francis Kramarz, 1998. "The Impact Of New Technologies On Wages: Lessons From Matching Panels On Employees And On Their Firms," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 5(2-4), pages 165-198.
    6. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, January.
    7. Nickell, Stephen & Nicolitsas, D., 1994. "Wages," LSE Research Online Documents on Economics 51644, London School of Economics and Political Science, LSE Library.
    8. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
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    Cited by:

    1. Miller, Marcus & Zhang, Lei, 1997. "Hyperinflation and Stabilisation: Cagan Revisited," Economic Journal, Royal Economic Society, vol. 107(441), pages 441-454, March.
    2. Mundaca,B.G. & Strand,J., 1999. "Speculative attacks in the exchange market with a band policy : a sequential game analysis," Memorandum 01/1999, Oslo University, Department of Economics.
    3. Michael Bordo & Anna Schwartz, 1996. "Why clashes between internal and external stability goals end in currency crises, 1797–1994," Open Economies Review, Springer, vol. 7(1), pages 437-468, March.
    4. Ozkan, F. Gulcin, 2003. "Explaining ERM realignments: Insights from optimising models of currency crises," Journal of Macroeconomics, Elsevier, vol. 25(4), pages 491-507, December.
    5. Pastine, Ivan, 2002. "Speculation and the decision to abandon a fixed exchange rate regime," Journal of International Economics, Elsevier, vol. 57(1), pages 197-229, June.
    6. Peter Kenen, 1996. "Analyzing and managing exchange-rate crises," Open Economies Review, Springer, vol. 7(1), pages 469-492, March.
    7. Jesper Rangvid, 1997. "Deviations from long-run equilibria and probabilities of devaluations: An empirical analysis of Danish realignments," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 133(3), pages 497-522, September.

    More about this item


    Currency Crises; Fixed Exchange Rates; Hysteresis; Self-Fulfilling; State-Dependence;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions


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