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Coordination Failures and Asset Prices

Author

Listed:
  • Aleh Tsyvinski
  • Christian Hellwig
  • Arihit Mukherji

Abstract

We augment a standard global coordination game along the lines of Morris and Shin (1998) by an asset market where prices are determined in a noisy Rational Expectations Equilibrium. We study the implications of information aggregation through prices for equilibrium selection arguments in global coordination games, first in a model where the asset market is separate from the coordination game but asset payoffs conditioned on the same fundamentals, then in a stylized currency crises model, where the asset market itself gives rise to the coordination problem. Information aggregation overturns the global games argument for equilibrium uniqueness, and implies that there may be multiple equilibria, in particular when private information is sufficiently precise. This conclusion also arises robustly within our currency crises model, provided that we take into account the role of domestic interest rates in determining the ultimate coordination outcome, along the lines suggested by Obstfeld (1986 and 1996). Despite multiplicity, the global games approach yields novel insights: All equilibria are characterized by discrete changes in domestic interest rates and the probability of devaluation in response to small changes in underlying fundamentals.

Suggested Citation

  • Aleh Tsyvinski & Christian Hellwig & Arihit Mukherji, 2004. "Coordination Failures and Asset Prices," 2004 Meeting Papers 72, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:72
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    Citations

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    Cited by:

    1. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
    2. Iván Werning & George-Marios Angeletos, 2006. "Crises and Prices: Information Aggregation, Multiplicity, and Volatility," American Economic Review, American Economic Association, vol. 96(5), pages 1720-1736, December.
    3. Randolph Luca Bruno, 2006. "Unique Equilibrium in a Model of Rule of Law," LEM Papers Series 2006/16, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    4. R. L. Bruno, 2008. "Rule of Law, Institutional Quality and Information," Working Papers 634, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Stephen Morris & Hyun Song Shin, 2006. "Endogenous Public Signals and Coordination," Levine's Bibliography 122247000000001309, UCLA Department of Economics.

    More about this item

    Keywords

    heterogeneous information; transparency; dynamic strategic complementarities;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G1 - Financial Economics - - General Financial Markets

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