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

Bernardo Guimaraes and Stephen Morris

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

Abstract: Market participants' risk attitudes, wealth and portfolio composition influence their positions in a pegged foreign currency and, therefore, may have important effects on the sustainability of currency pegs. We analyze such effects in a global game model of currency crises with continuous action choices. The model, solved in closed form, generates a rich set of theoretical predictions consistent with many popular and academic (unmodelled) speculations about the onset and timing of currency crises. The results extend linearly to a heterogeneous agent population.

Keywords: Currency crisis; Global games; Risk aversion; Wealth; Portfolio (search for similar items in EconPapers)
JEL-codes: D8 F3 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2003-09, Revised 2004-10
New Economics Papers: this item is included in nep-sea
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Citations: View citations in EconPapers (1)

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

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