A Theory of the Onset of Currency Attacks

Stephen Morris and Hyun Song Shin

No 1204, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: The swiftness and devastating impact of recent financial crises have taken many market participants by surprise, and pose challenges for economists seeking a theory of the onset of a crisis. We propose such a theory based on two features. The actions of diverse economic actors which undermine the currency are mutually reinforcing, while the fragmented nature of the media create small disparities in their information. In such circumstances, the beliefs of market participants can be tracked in the same way as the economic fundamentals, and an attack is triggered when the economic fundamentals deteriorate sufficiently to fall below the minimum level of market confidence necessary to support the currency. We give a characterization of such a minimum level of confidence.

Keywords: Currency crisis; common knowledge (search for similar items in EconPapers)
JEL-codes: D82 F31 (search for similar items in EconPapers)
Pages: 25 pages
Date: 1998-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Published in Agenor, Miller, Vines and Weber, eds., Asian Financial Crisis: Causes, Contagion and Consequences, Cambridge University Press, 1999

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Working Paper: A Theory of the Onset of Currency Attacks (1998)
Working Paper: A Theory of the Onset of Currency Attacks (1998)
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