Devaluation without common knowledge

Celine Rochon

No 2006-FE-03, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: In an economy with a fixed exchange rate regime that suffers a random adverse shock, we study the strategies of imperfectly and sequentially informed speculators that may trigger an endogenous devaluation before it occurs exogenously. The game played by the speculators has a unique symmetric Nash equilibrium which is a strongly rational expectation equilibrium in the set of all strategies with delay. Uncertainty about the extent to which the Central Bank is ready to defend the peg extends the ex ante mean delay between the exogenous shock and the devaluation. We determine endogenously the rate of devaluation.

Keywords: Currency crises; Fixed exchange rate regime; Speculation; Endogenous devaluation; Imperfect information (search for similar items in EconPapers)
JEL-codes: D82 D83 D84 E58 F31 F32 (search for similar items in EconPapers)
Date: 2006-02-01
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Citations: View citations in EconPapers (12)

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