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  4. December 2006
  5. Self-Fulfilling Currency Crises: The Role of Interest Rates

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Self-Fulfilling Currency Crises: The Role of Interest Rates

  • Christian Hellwig
  • Arijit Mukherji
  • Aleh Tsyvinski
American Economic Review
vol. 96, no. 5, December 2006
(pp. 1769–1787)
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Abstract

We develop a model of currency crises, in which traders are heterogeneously informed, and interest rates are endogenously determined in a noisy rational expectations equilibrium. In our model, multiple equilibria result from distinct roles an interest rate plays in determining domestic asset market allocations and the devaluation outcome. Except for special cases, this finding is not affected by the introduction of noisy private signals. We conclude that the global games results on equilibrium uniqueness do not apply to market-based models of currency crises. (JEL D84, E43, F32)

Citation

Hellwig, Christian, Arijit Mukherji, and Aleh Tsyvinski. 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates." American Economic Review 96 (5): 1769–1787. DOI: 10.1257/aer.96.5.1769

JEL Classification

  • D84 Expectations; Speculations
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • F32 Current Account Adjustment; Short-term Capital Movements