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CURRENCY ATTACKS WITH MULTIPLE EQUILIBRIA AND IMPERFECT INFORMATION: THE ROLE OF WAGE-SETTERS

Published online by Cambridge University Press:  18 January 2007

GIANLUCA FEMMINIS
GIANLUCA FEMMINIS
Affiliation:
Università Cattolica di Milano
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Abstract

We consider a dynamic stochastic model of currency attacks, characterized 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 coordination effect among agents, leading to multiple equilibria. Our results imply that a ‘transparent policy’ during a currency crisis is in the policymaker's interest.

Keywords

Currency AttacksFixed Exchange RateGlobal GamesMultiple EquilibriaAsymmetric Information
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 1 , February 2007 , pp. 79 - 112
Copyright
© 2007 Cambridge University Press

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