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Signaling in a Global Game: Coordination and Policy Traps

  • George-Marios Angeletos
  • Christian Hellwig
  • Alessandro Pavan

This paper examines the ability of a policy maker to control equilibrium outcomes in a global coordination game; applications include currency attacks, bank runs, and debt crises. A unique equilibrium is known to survive when the policy is exogenously fixed. We show that, by conveying information, endogenous policy re-introduces multiple equilibria. Multiplicity obtains even in environments where the policy is observed with idiosyncratic noise. It is sustained by the agents coordinating on different interpretations of, and different reactions to, the same policy choices. The policy maker is thus trapped into a position where both the optimal policy and the coordination outcome are dictated by self-fulfilling market expectations.

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File URL: http://www.kellogg.northwestern.edu/research/math/papers/1400.pdf
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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1400.

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Date of creation: Nov 2005
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Handle: RePEc:nwu:cmsems:1400
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  1. Kenneth Rogoff & Anne Sibert, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Oxford University Press, vol. 55(1), pages 1-16.
  2. Maurice Obstfeld, 1984. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
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  4. Rochet, Jean-Charles & Vives, Xavier, 2002. "Coordination failures and the lender of last resort : was Bagehot right after all?," HWWA Discussion Papers 184, Hamburg Institute of International Economics (HWWA).
  5. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
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  8. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
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  12. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  13. Christophe Chamley, 1999. "Coordinating Regime Switches," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 869-905.
  14. Hellwig, Christian, 2002. "Public Information, Private Information, and the Multiplicity of Equilibria in Coordination Games," Journal of Economic Theory, Elsevier, vol. 107(2), pages 191-222, December.
  15. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-fulfilling debt crises," Staff Report 211, Federal Reserve Bank of Minneapolis.
  16. Drazen, Allan, 2000. "Interest-rate and borrowing defense against speculative attack," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 303-348, December.
  17. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275, Cowles Foundation for Research in Economics, Yale University.
  18. Marco Battaglini & Roland Bénabou, 2003. "Trust, Coordination, and the Industrial Organization of Political Activism," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 851-889, 06.
  19. Corsetti, Giancarlo & Guimaraes, Bernardo & Roubini, Nouriel, 2006. "International lending of last resort and moral hazard: A model of IMF's catalytic finance," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 441-471, April.
  20. 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.
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  23. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
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