Expectations and information in second generation currency crises models

Massimo Sbracia and Andrea Zaghini

No 391, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We explore the role of expectations in second generation currency crisis models, proving that sudden shifts in speculators' beliefs can trigger currency devaluations, even without any sizable worsening in the fundamentals. In our incomplete information game, mean-preserving changes in speculators� expectations may drive agents to a unique equilibrium with a self-fulfilling attack. In particular, our model supports the thesis that uncertainty matters, since a sufficiently large increase in speculators' uncertainty over the fundamentals is likely to trigger a currency crisis. Following a recent line of research, we also compare the results of private and public information models and find the following paradox; if speculators have private information, the fact that the state of fundamentals is publicly revealed turns out to be more advantageous to the government when fundamentals are bad.

Keywords: currency crises; speculative attack; multiple equilibria (search for similar items in EconPapers)
JEL-codes: D82 F31 F33 (search for similar items in EconPapers)
Date: 2000-12
References: Add references at CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Expectations and information in second generation currency crises models (2001)
Working Paper: Expectations and Information in Second Generation Currency Crises Models (2000)
Working Paper: Expectations and Information in Second Generation Currency Crises Models (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_391_00

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