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

Gianluca Femminis

Macroeconomic Dynamics, 2007, vol. 11, issue 1, 79-112

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.

Date: 2007
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Working Paper: Currency Attacks with Multiple Equilibria and Imperfect Information: The Role of Wage-setters (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:11:y:2007:i:01:p:79-112_05

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