Foreign devaluation as a coordinating device of heterogeneous investors: A game‐theoretic analysis of financial contagion

Lioudmila Savtchenko

International Journal of Economic Theory, 2010, vol. 6, issue 2, 195-204

Abstract: This paper investigates financial contagion by extending the Morris–Shin (1998) model of financial crises. It is assumed that before a devaluation in a foreign country, home investors have only private information on the state of the home country. It is demonstrated that the occurrence of a currency crisis in the foreign country may trigger a similar crisis in the home country by coordinating heterogeneous beliefs of home investors. The model is designed to describe the Asian currency crisis of 1997.

Date: 2010
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https://doi.org/10.1111/j.1742-7363.2010.00130.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:ijethy:v:6:y:2010:i:2:p:195-204

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