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Expectations and Information in Second Generation Currency Crises Models

  • Massimo Sbracia

    (Bank of Italy)

  • Andrea Zaghini

    (Bank of Italy)

The paper explores the role of expectations in second generation currency crises models, providing an explanation for sudden shifts in speculators' behaviour that trigger currency devaluations, even without any sizeable worsening of the fundamentals of the economy. By focusing on expectations, we show that 'small' (mean-preserving) changes of speculators' probability assessment over the state of fundamentals may be sufficient to drive agents on a unique 'bad' equilibrium with a self-fulfilling attack that forces the government to devaluate the currency. Following a recent line of research, we also examine the role of information and that of common knowledge of agents' actions for the result of multiple equilibria. Unlike private information models, that entail a unique equilibrium for each level of the fundamentals, public information games, by restoring the common knowledge of players' actions, maintain multiple equilibria. Interestingly, by comparing the results of the two models, the following paradox emerges: providing public information seems to be more convenient when fundamentals are bad. An inspection on the reasons behind this paradox gives an illustration of how misleading conclusions might be when drawn from models with multiple equilibria, especially when considerations on the likelihood of the outcomes are neglected.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0462.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0462
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  1. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers.
  2. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part I: A Macroeconomic Overview," NBER Working Papers 6833, National Bureau of Economic Research, Inc.
  3. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
  4. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
  5. Fukao, Kyoji, 2003. "Coordination Failures under Incomplete Information and Global Games," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 44(1), pages 59-73, June.
  6. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  7. Heinemann, Frank & Illing, Gerhard, 2002. "Speculative attacks: Unique equilibrium and transparency," Munich Reprints in Economics 19430, University of Munich, Department of Economics.
  8. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis?," Temi di discussione (Economic working papers) 343, Bank of Italy, Economic Research and International Relations Area.
  9. repec:ner:tilbur:urn:nbn:nl:ui:12-154416 is not listed on IDEAS
  10. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407 National Bureau of Economic Research, Inc.
  11. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  12. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  13. Maurice Obstfeld, 1984. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
  14. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, June.
  15. Rubinstein, Ariel, 1989. "The Electronic Mail Game: Strategic Behavior under "Almost Common Knowledge."," American Economic Review, American Economic Association, vol. 79(3), pages 385-91, June.
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