Signaling in a Global Game: Coordination and Policy Traps

George-Marios Angeletos, Christian Hellwig and Alessandro Pavan

Journal of Political Economy, 2006, vol. 114, issue 3, 452-484

Abstract: This paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs. While exogenous asymmetric information has been shown to select a unique equilibrium, we show that the endogenous information generated by policy interventions leads to multiple equilibria. The policy maker is thus trapped into a position in which self-fulfilling expectations dictate not only the coordination outcome but also the optimal policy. This result does not rely on the freedom to choose out-of-equilibrium beliefs, nor on the policy being a public signal; it may obtain even if the policy is observed with idiosyncratic noise.

Date: 2006
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