Expectations and Contagion in Self-fulfilling Currency Attacks

Todd Keister ()

No 485, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: This paper shows how expectations-driven contagion of currency crises can arise even if the currency market has a unique equilibrium when viewed in isolation. The model of Morris and Shin (1998) is extended to allow speculators to trade in a second currency market. If speculators believe that a devaluation of this other currency will make a domestic devaluation more likely, they will engage in trades that link the two markets. A sharp devaluation of the other currency will then be propagated to the domestic market and will increase the likelihood of a crisis there, fulfilling the original expectations. Even though this contagion is driven solely by expectations, the model places restrictions on observable variables, and these restrictions are broadly consistent with existing empirical evidence

Keywords: Contagion; Currency Crisis; Coordination; Global Games (search for similar items in EconPapers)
JEL-codes: F31 G15 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2006-12-03

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http://repec.org/sed2006/up.18491.1139954823.pdf (application/pdf)

Related works:
Working Paper: Expectations and contagion in self-fulfilling currency attacks (2006)
Working Paper: Expectations and Contagion in Self-Fulfilling Currency Attacks (2005)
Journal Article: EXPECTATIONS AND CONTAGION IN SELF-FULFILLING CURRENCY ATTACKS (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:red:sed006:485

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