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Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises

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  • Fernando A. Broner

Abstract

The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency crises should be predictable and associated with small devaluations. This paper shows that these features of first generation models are not robust to the inclusion of private information. In particular, this paper analyzes a generalization of the Krugman-Flood-Garber (KFG) model, that relaxes the assumption that all consumers are perfectly informed about the level of fundamentals. In this environment, the KFG equilibrium of zero devaluation is only one of many possible equilibria. In all the other equilibria, the lack of perfect information makes the peg last past the point at which the shadow exchange rate equals it, giving rise to unpredictable and discrete devaluations

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  • Fernando A. Broner, 2004. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," 2004 Meeting Papers 264, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:264
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    Cited by:

    1. Dooseok Jang & Amrish Patel & Martin Dufwenberg, 2016. "Co-financing agreements and reciprocity: When 'no deal' is a good deal," University of East Anglia School of Economics Working Paper Series 2016-12, School of Economics, University of East Anglia, Norwich, UK..
    2. Broner, Fernando A., 2008. "Discrete devaluations and multiple equilibria in a first generation model of currency crises," Journal of Monetary Economics, Elsevier, pages 592-605.
    3. Welburn, Jonathan William & Hausken, Kjell, 2015. "A Game-Theoretic Model with Empirics of Economic Crises," UiS Working Papers in Economics and Finance 2015/7, University of Stavanger.
    4. Li, Mei & Milne, Frank, 2014. "The role of a large trader in a dynamic currency attack model," Journal of Financial Intermediation, Elsevier, pages 590-620.
    5. Calzolari, Giacomo & Pavan, Alessandro, 2008. "On the use of menus in sequential common agency," Games and Economic Behavior, Elsevier, pages 329-334.
    6. Jonathan William Welburn & Kjell Hausken, 2017. "Game Theoretic Modeling of Economic Systems and the European Debt Crisis," Computational Economics, Springer;Society for Computational Economics, vol. 49(2), pages 177-226, February.
    7. Bernardo Guimaraes, 2008. "Vulnerability of Currency Pegs: Evidence from Brazil," CEP Discussion Papers dp0871, Centre for Economic Performance, LSE.
    8. Daniëls, Tijmen R. & Jager, Henk & Klaassen, Franc, 2011. "Currency crises with the threat of an interest rate defence," Journal of International Economics, Elsevier, pages 14-24.
    9. Pablo Kurlat, 2015. "Optimal Stopping in a Model of Speculative Attacks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 212-226, April.
    10. Udo Kreickemeier & Douglas Nelson, 2017. "Fair Wages, Unemployment, and Technological Change in a Global Economy," World Scientific Book Chapters,in: International Trade and Labor Markets Welfare, Inequality and Unemployment, chapter 8, pages 205-235 World Scientific Publishing Co. Pte. Ltd..
    11. Bernardo Guimaraes, 2005. "Market Expectations and Currency Crises: Theory and Empirics," 2005 Meeting Papers 174, Society for Economic Dynamics.
    12. Kathy Yuan & Emre Ozdenoren & Itay Goldstein, 2008. "Learning and Complementarities: Implications for Speculative Attacks," 2008 Meeting Papers 276, Society for Economic Dynamics.
    13. Kris James Mitchener & Gonçalo Pina, 2016. "Pegxit Pressure: Evidence from the Classical Gold Standard," CESifo Working Paper Series 6212, CESifo Group Munich.
    14. Kathy Yuan & Emre Ozdenoren & Itay Goldstein, 2008. "Learning and Complementarities: Implications for Speculative Attacks," 2008 Meeting Papers 276, Society for Economic Dynamics.
    15. Guimaraes, Bernardo, 2006. "Dynamics of currency crises with asset market frictions," Journal of International Economics, Elsevier, pages 141-158.
    16. Gara Minguez-Afonso, 2007. "Imperfect Common Knowledge in First-Generation Models of Currency Crises," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 81-112, March.
    17. Guimarães, Bernardo, 2007. "Currency Crisis Triggers: Sunspots or Thresholds?," CEPR Discussion Papers 6487, C.E.P.R. Discussion Papers.
    18. Pina, Gonçalo, 2015. "The recent growth of international reserves in developing economies: A monetary perspective," Journal of International Money and Finance, Elsevier, pages 172-190.
    19. Lorenzoni, Guido, 2014. "International Financial Crises," Handbook of International Economics, Elsevier.
    20. Ufuk Akcigit & Qingmin Liu, 2011. "The Role of Information in Competitive Experimentation," NBER Working Papers 17602, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Currency crises; ¯rst generation models; timing; private information; learning;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F - International Economics

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