Currency Speculation in a Game-Theoretic Model of International Reserves

Carlos Pérez () and Manuel Santos ()
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Manuel Santos: Department of Economics, University of Miami

No 2011-2, Working Papers from University of Miami, Department of Economics

Abstract: This paper is concerned with the ability of speculation to generate a currency crisis. We consider a game-theoretic setting between a unit mass of speculators and a government that holds foreign currency reserves. We analyze conditions under which the speculators may be able to force the government to devaluate the currency. Among these conditions, we analyze the role of heterogeneous beliefs, transaction costs, the level of international reserves, and the widening of currency bands. The explicit consideration of international reserves in our model makes speculators’ actions to be strategic substitutes— rather than strategic complements. This is a main analytical departure with respect to related global games of currency speculation not including reserve holdings (e.g., Morris and Shin, 1998). Our simple framework with international reserves becomes suitable to review some long-standing policy issues.

Keywords: Currency speculation; international reserves; currency crises; global games; asymmetric information. (search for similar items in EconPapers)
JEL-codes: D8 F31 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2011
New Economics Papers: this item is included in nep-gth, nep-ifn and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mia:wpaper:2011-2

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