Self-Fulfilling Currency Crises: The Role of Interest Rates
Arijit Mukherji, and
Aleh Tsyvinski. 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates."
American Economic Review,
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)
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