Currency attacks with multiple equilibria and imperfect information: the role of wage setters

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Abstract

We consider a dynamic stochastic model of currency attacks, characterised by imperfect information about a fundamental. Agents not only decide whether to attack the peg but also formulate expectations concerning the probability of future devaluation. The subjective devaluation probabilities influence the inflation expectations, which, in turn, affect the next-period wage level and unemployment. Hence, expectations affect the following-period fundamental and the policymaker¿s ability to resist an attack. Agents decide upon next-period wage having observed whether the current-period currency attack has been successful or not: this publicly available information is sufficient to allow for a coordinated effect among agents, leading to multiple equilibria. Our results imply that a ¿transparent policy¿ during a currency crisis is in the policymaker¿s interest.
Lingua originaleEnglish
pagine (da-a)79-112.
Numero di pagine34
RivistaMacroeconomic Dynamics
Volume11
Stato di pubblicazionePubblicato - 2007

Keywords

  • Currency crises
  • Global game
  • asymmetric information

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