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Remarks on models of currency crises and the existance of multiple equilibria

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  • Adam Koronowski

Abstract

The aim of this paper is a reconsideration of some features of first and second generation models of currency crises and some conclusions from these models. In particular, theoretical justification for the existence of multiple equilibria is put under discussion in a broader context of uncertainity and expectations. The role that different assumptions concerning government and monetary authority’s behaviour play in the determination of the results of first generation models is analyzed and thedeterministic character of these models which does not allow for multiple equilibria is explained. An explanation is suggested why equilibria can be in practice unstable when the rule of central bank’s (government’s) behaviour is not clear as it is in the models. The structure of a second generation model is analyzed with an intention to explain that for the existence of multiple equilibria there must be a convincing justification based on the game theory which the second generation lacks. It is also pointed out that an equilibrium may not exist at all. It is argued in this paper that in the world of rational expectations and perfect foresight a change of an equilibrium is possible only due to an external shock. Vulnerability of a fixed exchange rate to shocks is thus an important issue. Consequently, some features of an economy and economic policy which make fixed exchange rate vulnerable to external shocks are discussed.

Suggested Citation

  • Adam Koronowski, 2003. "Remarks on models of currency crises and the existance of multiple equilibria," NBP Working Papers 28, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:28
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