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Unique Equilibrium in a Model of Self-fulfilling Currency Attacks

Author

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  • Morris, Stephen
  • Shin, Hyun Song
Abstract
Even though self-fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge, we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise on their signals about the fundamentals. This unique equilibrium depends not only on the fundamentals, but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading. In contrast to multiple equilibrium models, our model allows analysis of policy proposals directed at curtailing currency attacks.

Suggested Citation

  • 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.
    • Handle: RePEc:cpr:ceprdp:1687
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    Keywords

    Common Knowledge; Currency Crisis;

    JEL classification:

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

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