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A Theory of the Onset of Currency Attacks

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  • Morris, S.
  • Shin, H.S.

Abstract

The swiftness and devastating impact of recent financial crises have taken many market participants by surprise, and pose challenges for economists seeking a theory of the onset of a crisis. We propose such a theory based on two features. The actions of diverse economic actors which undermine the currency are mutually reinforcing, while the fragment nature of the media create small disparities in their information. In such circumstances, the beliefs of market participants can be tracked in the same way as the economic fundamentals, and an attach is triggered when the economic fundamentals deteriorate sufficiently to fall below the minimum level of market confidence necessary to support the currency. We give a characterization of such a minimum level of confidence.

Suggested Citation

  • Morris, S. & Shin, H.S., 1998. "A Theory of the Onset of Currency Attacks," Economics Papers 149, Economics Group, Nuffield College, University of Oxford.
  • Handle: RePEc:nuf:econwp:149
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    Cited by:

    1. Toxvaerd, Flavio, 2008. "Strategic merger waves: A theory of musical chairs," Journal of Economic Theory, Elsevier, vol. 140(1), pages 1-26, May.
    2. Flavio Toxvaerd & Chryssi Giannitsarou, 2004. "Recursive global games," Money Macro and Finance (MMF) Research Group Conference 2003 104, Money Macro and Finance Research Group.
    3. Femminis, Gianluca, 2007. "Currency Attacks With Multiple Equilibria And Imperfect Information: The Role Of Wage-Setters," Macroeconomic Dynamics, Cambridge University Press, vol. 11(1), pages 79-112, February.
    4. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, vol. 48(1), pages 133-153, February.
    5. Bernardo Guimaraes, 2008. "Vulnerability of Currency Pegs: Evidence from Brazil," CEP Discussion Papers dp0871, Centre for Economic Performance, LSE.
    6. Broner, Fernando A., 2008. "Discrete devaluations and multiple equilibria in a first generation model of currency crises," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 592-605, April.
    7. Mundaca, Gabriela, 2003. "Optimal bailout during currency and financial crises: A sequential game analysis," Memorandum 27/2002, Oslo University, Department of Economics.
    8. Christian Hellwig, 2004. "Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks (August 2006, with George-Marios Angeletos and Alessandro Pavan)," UCLA Economics Online Papers 279, UCLA Department of Economics.
    9. Camille Cornand & Frank Heinemann, 2008. "Optimal Degree of Public Information Dissemination," Economic Journal, Royal Economic Society, vol. 118(528), pages 718-742, April.
    10. Guimarães, Bernardo, 2007. "Currency Crisis Triggers: Sunspots or Thresholds?," CEPR Discussion Papers 6487, C.E.P.R. Discussion Papers.
    11. 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.
    12. 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.
    13. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2004. "Information Dynamics and Equilibrium Multiplicity in Global Games of Regime Change," NBER Working Papers 11017, National Bureau of Economic Research, Inc.
    14. Christophe Chamley, 2002. "Dynamic Speculative Attacks," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-119, Boston University - Department of Economics.

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    More about this item

    Keywords

    CURRENCIES ; MONETARY CRISIS;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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