Speculative attacks: Unique equilibrium and transparency

Frank Heinemann and Gerhard Illing

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: Models with multiple equilibria are a popular way to explain currency attacks. Morris and Shin (1998) have shown that, in the context of those models, unique equilibria may prevail once noisy private information is introduced. In this paper, we apply the method of Morris and Shin to a broader class of probability distributions and show-using the technique of iterated elimination of dominated strategies-that their results continue to hold, even if we allow for sunspots and individual uncertainty about strategic behavior of other agents. We provide a clear exposition of the logic of this model and we analyze the impact of transparency on the probability of a speculative attack. For the case of uniform distribution of noisy signals, we show that increased transparency of government policy reduces the likelihood of attacks.

Date: 2002
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Published in Journal of International Economics 2 58(2002): pp. 429-450

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