Risk and Wealth in a Model of Self-fulfilling Currency Crises

Bernardo Guimaraes and Stephen Morris

No 1433, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We analyze the effect of risk aversion, wealth and portfolios on the behavior of investors in a global game model of currency crises with continuous action choices. The model generates a rich set of striking theoretical predictions. For example, risk aversion makes currency crises significantly less likely; increased wealth makes crises more likely; and foreign direct investment (illiquid investments in the target currency) make crises more likely. Our results extend linearly to a heterogeneous agent population.

Keywords: Currency crisis; Sunspots; Global games; Risk aversion; Wealth; Portfolio (search for similar items in EconPapers)
JEL-codes: D8 F3 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2003-09
New Economics Papers: this item is included in nep-ifn and nep-rmg
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Citations: View citations in EconPapers (2)

Published in Journal of Monetary Economics (2007), 54: 2205-2230

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Working Paper: Risk and Wealth in a Model of Self-fulfilling Currency Crises (2004)
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