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Risk and wealth in a model of self-fulfilling currency attacks

  • Bernardo Guimaraes
  • Stephen Morris

Market participants' risk attitudes, wealth and portfolio composition in°uence their positions in a pegged foreign currency and, therefore, may have important e®ects on the sustainability of currency pegs. We analyze such e®ects in a global game model of currency crises with continuous action choices, generating a rich set of theoretical comparative static predictions related to often discussed but rarely modelled accounts of the onset and timing of currency crises. The model can be solved in closed form and the methods could be used to study other economic issues in which coordination and risk aversion play important roles.

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File URL: http://eprints.lse.ac.uk/4804/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 4804.

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Length: 34 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:ehl:lserod:4804
Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
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Web page: http://www.lse.ac.uk/

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  1. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275R, Cowles Foundation for Research in Economics, Yale University, revised Aug 2001.
  2. Hyun Song Shin & Stephen Morris, 2001. "Coordination Risk and the Price of Debt," FMG Discussion Papers dp373, Financial Markets Group.
  3. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2006. "Signaling in a Global Game: Coordination and Policy Traps," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 452-484, June.
  4. Hans Carlsson & Eric van Damme, 1993. "Global Games and Equilibrium Selection," Levine's Working Paper Archive 122247000000001088, David K. Levine.
  5. Laurent Mathevet, 2010. "A contraction principle for finite global games," Economic Theory, Springer, vol. 42(3), pages 539-563, March.
  6. Ivan Werning & George-Marios Angeletos, 2005. "Crises and Prices: Information Aggregation, Multiplicity and Volatility," 2005 Meeting Papers 284, Society for Economic Dynamics.
  7. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2004. "Coordination and Policy Traps," Levine's Bibliography 122247000000000294, UCLA Department of Economics.
  8. International Monetary Fund, 2004. "When in Peril, Retrench: Testing the Portfolio Channel of Contagion," IMF Working Papers 04/131, International Monetary Fund.
  9. Bernardo Guimaraes & Stephen Morris, 2005. "Risk and Wealth in a Model of Self-Fulfilling Currency Attacks," Levine's Bibliography 122247000000000790, UCLA Department of Economics.
  10. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers.
  11. Guillermo A. Calvo & Enrique G. Mendoza, 1999. "Regional Contagion and the Globalization of Securities Markets," NBER Working Papers 7153, National Bureau of Economic Research, Inc.
  12. Hyun Song Shin & Giancarlo Corsetti & Amil Dasgupta & Stephen Morris, 2001. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," FMG Discussion Papers dp372, Financial Markets Group.
  13. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, 08.
  14. Frankel, David M. & Morris, Stephen & Pauzner, Ady, 2003. "Equilibrium selection in global games with strategic complementarities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 1-44, January.
  15. 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.
  16. Dasgupta, Amil, 2007. "Coordination and delay in global games," Journal of Economic Theory, Elsevier, vol. 134(1), pages 195-225, May.
  17. Kraay, Aart, 2000. "Do high interest rates defend currencies during speculative attacks ?," Policy Research Working Paper Series 2267, The World Bank.
  18. Frankel, David M. & Pauzner, Ady, 2000. "Resolving Indeterminacy in Dynamic Settings: The Role of Shocks," Staff General Research Papers 11924, Iowa State University, Department of Economics.
  19. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  20. Christophe Chamley, 2003. "Dynamic Speculative Attacks," American Economic Review, American Economic Association, vol. 93(3), pages 603-621, June.
  21. Nikola A. Tarashev, 2003. "Currency Crises and the Informational Role of Interest Rates," BIS Working Papers 135, Bank for International Settlements.
  22. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  23. Christian Hellwig & Arijit Mukherji & Aleh Tsyvinski, 2005. "Self-Fulfilling Currency Crises: The Role of Interest Rates," NBER Working Papers 11191, National Bureau of Economic Research, Inc.
  24. Goldstein, Itay & Pauzner, Ady, 2004. "Contagion of self-fulfilling financial crises due to diversification of investment portfolios," Journal of Economic Theory, Elsevier, vol. 119(1), pages 151-183, November.
  25. repec:ner:tilbur:urn:nbn:nl:ui:12-154416 is not listed on IDEAS
  26. Guimaraes, Bernardo, 2006. "Dynamics of currency crises with asset market frictions," Journal of International Economics, Elsevier, vol. 68(1), pages 141-158, January.
  27. Taimur Baig & Ilan Goldfajn, 2000. "The Russian default and the contagion to Brazil," Textos para discussão 420, Department of Economics PUC-Rio (Brazil).
  28. 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.
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