Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises

Fernando Broner

No 264, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency crises should be predictable and associated with small devaluations. This paper shows that these features of first generation models are not robust to the inclusion of private information. In particular, this paper analyzes a generalization of the Krugman-Flood-Garber (KFG) model, that relaxes the assumption that all consumers are perfectly informed about the level of fundamentals. In this environment, the KFG equilibrium of zero devaluation is only one of many possible equilibria. In all the other equilibria, the lack of perfect information makes the peg last past the point at which the shadow exchange rate equals it, giving rise to unpredictable and discrete devaluations

Keywords: Currency crises; ¯rst generation models; timing; private information; learning (search for similar items in EconPapers)
JEL-codes: D8 E58 F F31 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-ifn and nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises (2015)
Journal Article: Discrete devaluations and multiple equilibria in a first generation model of currency crises (2008)
Working Paper: Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises (2006)
Working Paper: Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises
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