 Currency Attacks with Multiple Equilibria and Imperfect Information: The Role of Wage-settersNo 3291, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: We consider a dynamic stochastic model of currency attacks, characterised by imperfect information about the fundamental. Agents, who imperfectly know the state of the economy, 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 their turn, affects the second period wage level and hence, unemployment. In this way, first period expectations affect the second period fundamental and hence the policymaker?s ability to resist to an attack. We show that equilibrium expectations may be either ?optimistic? or ?pessimistic?. Optimistic (pessimistic) expectations involve a currency attack equilibrium characterised by a low (high) probability of devaluation. This result is due to the fact that 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. Keywords: Currency attacks; Fixed exchange rate; Multiple equilibria; Asymmetric information; Global games (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:3291 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
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