Expectations and Contagion in Self-Fulfilling Currency Attacks

Todd Keister

No 501, Working Papers from Centro de Investigacion Economica, ITAM

Abstract: This paper shows how expectations-driven contagion of currency crises can arise even if the currency market has a unique equilibrium when viewed in isolation. The model of Morris and Shin (1998) is extended to allow speculators to trade in a second currency market. If speculators believe that a devaluation of this other currency will make a domestic devaluation more likely, they will engage in trades that link the two markets. A sharp devaluation of the other currency will then be propagated to the domestic market and will increase the likelihood of a crisis there, fulfilling the original expectations. Even though this contagion is driven solely by expectations, the model places restrictions on observable variables, and these restrictions are broadly consistent with existing empirical evidence.

Pages: 22 pages
Date: 2005-04
New Economics Papers: this item is included in nep-fmk, nep-ifn, nep-mon and nep-sea
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Citations: View citations in EconPapers (1)

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http://ftp.itam.mx/pub/academico/inves/keister/05-01.pdf First version, 2005 (application/pdf)

Related works:
Journal Article: EXPECTATIONS AND CONTAGION IN SELF-FULFILLING CURRENCY ATTACKS (2009)
Working Paper: Expectations and contagion in self-fulfilling currency attacks (2006)
Working Paper: Expectations and Contagion in Self-fulfilling Currency Attacks (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:cie:wpaper:0501

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