A Theory of the Onset of Currency Attacks

Stephen Morris and Hyun Song Shin

No 2025, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The swiftness and devastating impact of recent financial crises have taken many market participants by surprise and pose challenges for economists seeking a theory of the onset of a crisis. We propose such a theory based on two features. The actions of diverse economic actors which undermine the currency are mutually reinforcing, while the fragmented nature of the media create small disparities in their information. In such circumstances, the beliefs of market participants can be tracked in the same way as the economic fundamentals and an attack is triggered when the economic fundamentals deteriorate sufficiently to fall below the minimum level of market confidence necessary to support the currency. We give a characterization of such a minimum level of confidence.

Keywords: Common Knowledge; Currency Crisis (search for similar items in EconPapers)
JEL-codes: D82 F31 (search for similar items in EconPapers)
Date: 1998-11
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Citations: View citations in EconPapers (7)

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Working Paper: A Theory of the Onset of Currency Attacks (1998)
Working Paper: A Theory of the Onset of Currency Attacks (1998)
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