A new & simple model of currency crisis: Bifurcations and the emergence of a bad equilibrium

Partha Gangopadhyay

Physica A: Statistical Mechanics and its Applications, 2020, vol. 538, issue C

Abstract: This paper considers the question of currency crisis in a dynamic setting in which agents do nothold rational expectations. Under a sufficient condition the paper shows the possibility of a collapse of the currency due to a progressive loss of reserves. It is important to note that a collapse is not triggered by a bad policy, or bad luck, but due to a regime-shift from a stable to an unstable and unique steady state – bad equilibrium. In this sense the paper offers a new explanation of currency crisis: a crisis that erupts even when there is no evidence of bad policy, or of multiple equilibria (bad luck). The model is further extended to a case of heterogeneous agents.

Keywords: Bifurcations; Currency crisis; Dynamics of fundamentals; Rational irrationality; Stability properties; Steady states (search for similar items in EconPapers)
JEL-codes: C61 F31 F41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:538:y:2020:i:c:s0378437119316255

DOI: 10.1016/j.physa.2019.122860

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